Nigerian banks have experienced a significant increase in impaired loans, reflecting the economic slowdown in recent years. Zenith Bank, Guaranty Trust Holding Company (GTCO), United Bank for Africa (UBA), and several other commercial banks collectively reported impairment costs of N658.73 billion in the first half of 2023, marking a 285.2 percent surge from N171 billion in the same period in 2022.
Impaired loans occur when it is unlikely that the lender will be able to recover the full value of the loan. The surge in impairments is attributed to exposure to businesses facing challenges due to a higher interest rate environment and escalating macroeconomic issues.
Zenith Bank, the country’s largest lender by market value, made the most significant provision of N208 billion, followed by United Bank of Africa (N143 billion). Zenith Bank noted in its audited H1 2023 result that impairment levels had increased significantly due to the heightened risk environment, with the cost of risk growing from 1.4 percent to 8.8 percent.
Guaranty Trust Holding Company (GTCO) ranked third, making a provision of N82.96 billion, while FBN Holdings and Ecobank recorded impairment losses of N57.63 billion and N50.46 billion, respectively.
GTCO’s investor presentation revealed that the group recognized N81.3 billion in H1 2023 as an impairment charge on other financial assets. This was a result of management overlay due to the increased loss rate on its investment in Ghanaian sovereign securities and other foreign currency financial instruments sensitive to adverse exchange rate movements.
Other banks also reported impairment costs, including FCMB (N47.08 billion), Access Holdings (N37.18 billion), Fidelity (N19.92 billion), Stanbic IBTC (N5.98 billion), Sterling Holdings (N4.16 billion), Wema (N1.40 billion), and Unity Bank (N0.03 billion).
In July, Fitch Ratings, a global credit rating agency, predicted that Nigerian banks would experience an increase in impaired loans due to rising inflation and interest rates, which burden borrowers’ debt servicing capacity. The devaluation of the naira and the removal of fuel subsidies were expected to lead to higher near-term inflation and tighter monetary policy, constraining economic growth.
Fitch affirmed the ‘B-‘ long-term issuer default ratings of the vast majority of Nigerian banks with stable outlooks. However, it noted that the naira devaluation would impact capital ratios, leading to inflation of banks’ foreign-currency (FC)-denominated risk-weighted assets in naira terms and increasing prudential provisions required against FC-denominated problem loans, adding pressure on regulatory capital ratios.
Despite these challenges, Fitch considered the key reforms implemented by President Bola Tinubu to be credit positive overall for the country.
The surge in impaired loans has raised concerns about the overall health of Nigeria’s banking sector. With several major banks reporting significant impairment costs, there are fears that this trend could continue if economic conditions do not improve. The increase in impairment costs is a reflection of the challenges faced by businesses in Nigeria, especially those in sectors sensitive to interest rate changes and exchange rate fluctuations.
The Nigerian economy has faced several headwinds in recent years, including inflationary pressures, currency devaluation, and a volatile global economic environment. These factors have made it difficult for businesses to operate profitably and service their debt obligations. As a result, banks have had to make provisions for potential loan losses, which has impacted their financial performance.
The Central Bank of Nigeria (CBN) has also implemented measures to address the rising level of impaired loans in the banking sector. These measures include stricter loan classification and provisioning requirements, as well as the introduction of higher capital adequacy ratios. While these measures are aimed at strengthening the banking sector’s resilience, they have also added to the challenges faced by banks.
Analysts suggest that Nigerian banks need to adopt a more cautious approach to lending and risk management in the current economic environment. This includes conducting thorough credit assessments and stress testing to identify potential vulnerabilities in their loan portfolios. Additionally, banks should diversify their loan portfolios to reduce concentration risk and explore opportunities in sectors with more stable outlooks.
The Nigerian government also has a role to play in supporting economic recovery and stability. Policies that promote economic growth, reduce inflationary pressures, and stabilize the exchange rate are essential for creating a more conducive environment for businesses and, by extension, the banking sector.