- It’ll improve profitability next financial year — Investors
By Ngozi Amuche
Eight commercial banks have successfully reduced their loan impairment profiles to the tune of N230.684billion in 2018, against N488.155billion in 2017.
This followed the clamour by shareholders that banks should reduce their bad loans.
Collectively, the banks’ bad loans of N488, 155 billion as at the end of 2017 dropped sharply to N230.684billion at the end of 2018; representing over 62 per cent recoup.
Invariably, the banks had been able to recover debts totaling N230.684 billion, a development investors applauded, saying that it will improve profitability of the banks in the next financial year.
In terms of definition, a loan is said to be impaired when it is not certain that all the related principal and interest payments will be collected.
However, the eight banks that reported the feat in loan recovery within the year under review are: First Bank of Nigeria Plc, Ecobank Trans-International, Zenith Bank Plc, Access Bank Plc, First City Monument Bank Plc, Sterling Bank Plc, United Bank for Africa Plc and Fidelity Bank Plc.
A detailed analysis of the banks’ bad debt profile showed that FBN leads with N86.911billion reduction in its bad debts (impairment losses) in 2018, against N150.424billion reported at the end of 2017. ETI Plc followed with a drop of N82.044 billion in 2018, from N125.893billion reported in the 2017 financial year. Zenith Bank reduced its loan exposure to N18.372billion in 2018, as against N98.227 billion in 2017.
In the same vein, Access Bank recorded a drop of N14, 656 billion in its bad loans in 2018, compared to N34.466billion in the corresponding period of 2017, while FCMB also reported N14.113 billion in 2018, down from N22.667 billion in 2017.
Others are Sterling Bank, which reported N5.843billion in 2018, against N12.267 billion in 2017. UBA also reported N4.529 billion in 2018, against N32.895 billion in 2017.
Market pundits applaud reduction Some financial and economic analysts, who spoke with The Point, have admitted that the drop in the banks’ loan impairment is a welcome development, which will improve profitability and returns on investment to shareholders.
A chartered stockbroker/Managing Director, Sofunix Investment and Communications, Mr. Sola Oni, said, “Impairment loss indicates decline in the future economic benefits of an asset after charges for depreciation. Decline in impairment loss reflects managerial effectiveness. For instance, goodwill must be tested annually to ascertain that its recorded value is higher than fair value, otherwise, goodwill will be deemed impaired.
According to Oni, shareholders benefit from reduction in impairment as it provides valuable information on how a company manages its goodwill.
“It also enables shareholders to evaluate quality of management’s decision making process and track records. Any write-off due to an impairment loss can adversely affect a company’s balance sheet and its financial ratios,” he said.
He added that banks derived interest income from loans and deposits, saying that the prevailing economic situation had made loans unattractive, as banks were cautious of giving loans to avert challenges of default.
“Customers are also cautious in applying for loan. This scenario has made the margin from interest income to shrink. Interest income is also a function of a bank’s sensitivity to asset and liability in the event of changes in interest rate. Many banks’ assets are in loans because loans have higher interest rates. This is expected because loans are riskier assets compared with marketable securities,” he said.
The Managing Director/CEO, APT Securities & Funds Limited, Mallam Garba Kurfi, said, “The implication of the reduction of impairment by over 70 per cent in 2018, shows the extent commercial banks have gone in cleaning their bad debts and also the lesser loans given by the banks, which affects the progress of the economy, just as the decline in Gross Domestic Products.
According to him, the less the declaration of impairment by the banks, the more the profits they will record and also the better for shareholders.
A capital market analyst, Mr. Chinedu Okafor, said the banks’ reduction in bad debts was a sign that the loan facilities given were not performing and it had a grave consequence on the banking industry, which meant danger loomed in the sector.
Okafor added that the performance of these banks also showed that they concentrated more on Treasury Bills, and FGN Bonds rather than lending, which is the core business of banking.
“The banks should try to give loans that will help the manufacturing sector to grow. The loans to this sector should be less risky when compared with those in the services sector,” he said.
The Managing Director/Chief Executive Officer, Solid-Rock Securities and Investment Plc, Mr. Patrick Ezeagu, said, “Government’s restructuring of its portfolio of Treasury Bills impacted negatively on interest income of banks that had a stronghold in this asset class. But the good thing is that the decline in interest income is also offset by the corresponding reduction in interest expense. In this regime of marginal interest income, banks should de-risk their portfolios and focus more on loan growth-oriented sectors,” he added.
Head, Research & Investment, FSL Securities Limited, Mr. Victor Chiazor, said, “A reduction on impairment charge directly improves the profitability of the banks, which also increases the return to shareholders. Given the marginal rise in net interest income, this suggests that the banks need to increase their loan books and not rely on high interest rates to grow interest income. Instead, they should focus on putting systems in place to reduce their credit risk during loan periods.”
National Chairman, Progressive Shareholders Association, Mr. Boniface Okezie, said, “The final quarter for most banks is typically telling, because it is after then that they conduct full audit of their accounts. Auditors often take a conservative approach towards credit assessments and may force the banks to provision for more bad loans, which is unethical. If this occurs, then we may be looking at one of the highest growth in impairments for Nigerian banks in over a decade.”
Many of the banks’ CEOs in their financial statements, had collectively said allowances for impairment of loans and advances to customers were key judgmental areas of their audits, due to the level of subjectivity inherent in estimating the impact of key assumptions on the recoverability of loan balances.
They explained that the economic situation had particularly affected the ability of bank customers to meet credit obligations. Thus, significant judgment is required to determine the allowance for impairment for loans and advances granted to the banks’ customers, particularly the foreign currency denominated loans and advances.