The volume of stage two loans could be a threat to the banking industry’s asset quality and future profitability even as the Central Bank of Nigeria’s (CBN) measures to support the Naira could squeeze financial institutions already hit by fallout from coronavirus and the oil price shock.
This was the view of Agusto & Co. Limited, in its recently released flagship 2020 Banking Industry Report. According to the report, approximately 23 per cent of the industry’s gross loans and advances was classified in the stage two category as at December 31, 2019, according to the International Financial Reporting Standard (IFRS) 9.
The report stated that four out of the 24 banks covered in the report had stage two loans to gross loans ratios above the 23 per cent industry’s average. Stage two loans primarily comprise exposures with an increase in the associated credit risk compared to when the loan was disbursed.
The report said: “Following the forbearance granted by CBN in March 2020, permitting banks to restructure loans to businesses that have been adversely impacted by the novel COVID-19 pandemic, the banking industry had restructured over N7.8 trillion (almost half) of the loan portfolio as at June 2020, according to the CBN.
While the forbearance is expected to keep the industry’s impaired loan ratio, which stood at 7.6 per cent as at December 31, 2019, at bay in the short term, Agusto & Co. is concerned about the performance of these affected loans, given that the coronavirus pandemic is yet to be curtailed and a second wave may be looming. A further slowdown in economic activities and a total lockdown may worsen an already bad situation”.
Furthermore, the research house and rating institution said “it is projecting a 6 per cent GDP contraction in 2020 while acknowledging that there is likely to be an extension of the forbearance period in the event that the pandemic lingers.
“We expect a rise in the impaired loan ratio of the banking industry in the medium term. Our expectations are also driven by the regulatory-induced growth in the loan book driven by the minimum loan-to-deposit ratio (LDR) policy, with sanctions to banks for non-compliance through additional CRR debits.”