A high level of exposure to the troubled oil and gas sector as well as manufacturing sectors of the Nigerian economy is causing pains for Nigerian banks currently. Figures obtained from the Financial Stability Report (FSR) published by the Central Bank of Nigeria (CBN) shows that the biggest beneficiaries of bank lending in Nigeria are the oil and the manufacturing sectors.
The FSR shows that as at December 2015, Nigerian banks had 24.82% of their N13 trillion credit to the oil sector. The oil sector actually had the highest amount of credit from Nigerian banks. Manufacturing sector ranked second with 13.91% of total banking loans as at the end of 2015. So the oil sector and manufacturing sector had 39% of all banking loans in the country in 2015. This represents about N5 trillion of banking loans made in Nigeria in 2015.
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Sadly, for Nigerian banks, the two biggest sectors benefiting from banking loans have run into difficult times. The result is that companies in both sectors are now finding it difficult to repay their loans. The oil sector has seen a sharp drop in crude oil prices from slightly over a $100 per barrel to less than $40 per barrel for a prolonged period of time. The drop took many of the banks by surprise as many banks and even the oil companies had not expected that crude oil prices will drop that low.
Many banks have struggled to restructure their loans to the oil and gas firms but many of the firms have still struggled to repay as many of them, especially the indigenous oil firms had acquired oil assets at inflated prices when crude oil prices were above $100 per barrel. So with oil prices below $50 per barrel, many of these indigenous oil firms are finding that these are assets are no longer profitable to operate. The challenge with the oil sector has also been compounded by the return of militancy in the Niger Delta region, which has resulted in many of the oil firms unable to sustain production. These has led to a high number of idle assets in the oil and gas sector, leading to the firms with the idle assets unable to repay their loans.
The manufacturing sector is also facing critical challenges. For example, the CBN latest Purchasing Managers Index (PMI) for the manufacturing sector stands at 41.9 points, a clear indication that the manufacturing sector is in real trouble. The PMI has been in consistent decline for the last six months with the decline actually accelerating from 45.8 points in May to 41.9 points in June. A PMI below 50 points is bad news as it shows that the economy is contracting.
To show how bad the Nigerian manufacturing sector is performing, of the 16 subsectors tracked in manufacturing, 14 sectors showed declining performance. The Nigerian manufacturing sector has been specially troubled by a severe energy crisis for most of 2016, the CBN’s decision to ban 41 items, as well as the rationing foreign exchange, which resulted in many manufacturers unable to access foreign exchange to import raw materials.
There has also been bank specific challenges like the decision of the Federal Government to strictly implement the Treasury Single Account (TSA), which led to the withdrawal from the Nigerian banking system of about N3 trillion within a short period of one month. This took out of the banking system a significant chunk of their liquidity leaving many banks without a significant source of cheap funds that they have come to rely on.
The extent to which each bank is affected by the above factors largely depends on their level of exposure to the sectors. A bank with high exposure to the oil gas sector, manufacturing and also public sector funds will likely be in more trouble than a bank that had less exposure to all the three sectors. However, there are speculations that the level of bad debts in the banking sector has risen as high as 20%. Sadly, the current challenge for Nigerian banks come at a time, the Asset Management Company of Nigeria (AMCON) is in no position to save any of the banks. AMCON is already overburdened with the over N5 trillion loans it purchased from the Nigerian banking sector between 2007 to 2010, which it has been struggling to recover from recalcitrant debtors.
AMCON’s inability to intervene in buying toxic assets from the banking system means that any bank that cannot be saved by CBN will most likely allowed to die. But assured on 7 July that Nigerians do not need to panic over the health of Nigerian banks.
“The CBN wishes to reiterate in the strongest terms that these rumours and speculations are untrue and do not reflect the actual health of the individual banks and, indeed, the entire banking industry” the CBN statement signed by Isaac Okorafor, Acting Director, Corporate Communications
No doubt Nigerian banks are facing difficult times. But many Nigerian banks are highly capitalized also and may be in a position to withstand the current shock though not without significant bruises.
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