*Why Collateral Can’t Save The Banks
The harsh reality of the economic significance of the dreaded coronavirus Nigeria is finally dawning on the nation.
Except the interventions of some celestial forces come to the rescue, the country’s finance sector as well as the oil and gas industry face hard times as some unprecedented bankruptcy lurks around the corner.
The finance and oil sector being the mainstay of the economy, then the country may be taking a plunge down the deadly precipice. The figures paint ominous picture of the immediate future while the facts are expressed with mean truths.
With a total assets worth over N40 trillion in September 2019, Nigeria’s banking sector ranks second in sub-Saharan Africa behind South Africa. That healthy standing appears threatenedas oil prices have come crashing in the wake of COVID-19. Small and mid-sized Nigerian banks may be constrained to rebuild capital levels going forward as it would be difficult for businesses to repay loans, including oil companies.
Presently, many indigenous oil and gas producers in Nigeria are struggling to stay afloat, as prices of their products have fallen below production costs. This is just as they are failing to meet their debt obligations to deposit money banks. The result is that their portion of non-performing loans in the banking industry is threatening the soundness of the nation’s banking sector.
The oil and gas sector represented about 30 per cent of Nigerian banks’ gross loans at the end of third quarter of 2019. Accordingly, loan quality is highly correlated to oil prices, as seen during previous oil price shocks in 2008-2009 and 2015-2016. Though impaired loans have decreased since 2017 due to rising oil prices as well as recoveries and write-offs, the current shock could lead to a significant increase.
Any closures of oil fields due to a collapse in global oil demand would exacerbate the impact.
The biggest problem local upstream operators face to today is the apparent mismatch between their loan exposure and the significantly dwindled revenues due to the Coronavirus pandemic.
With sub $20 per barrel prices for crude, these companies are in dire straits. Average cost of production per barrel in Nigeria is about $30 per barrel due largely to high cost of operation and security related expenses that are peculiar to the Nigerian environment.
The burden of managing community restiveness has been practically left to these operators alone.
The Trans Forcados Pipelines and the Nembe Creek Trunklinethrough which most of these operators evacuate their crude are often the target of militant attacks leading to incessant force majeures. However, the loan agreements with these indigenous players were structured in a manner that does not provide for force majeure.
Interests on these loans continue to mount regardless of the reality on ground. A chief executive of one of the indigenous companies who spoke on the condition of anonymity said banks needed to be more sensitive to the plight of their customers. He maintained that moratorium on principal alone would not be sufficient as the operators simply cannot pay the interests for now.
He called out the banks for striving to make profit in an economy where the companies they are funding are going under. According to him “banks need to put their skin in the game and realise that this is a symbiotic business. All stakeholders must partake in the shared losses at this time so that when the rebound occurs, we equally share in it.’’
As at the beginning of the year, tier-one banks were estimated to have had an oil exposure of over N4.33 trillion, meaning banks could be forced to make trillions in loan loss provisions and impairments as bonny light oil prices have fallen from around $66 at the start of the year to as low $12 per barrel.
The impact of current situation would lead to weaker earnings in 2020 if the oil loans, especially the upstream oil loans are fully provided for. In other words, banks may have to declare losses at the end of the year despite modest results released in Q1.
Reflecting its expectation that banks will face material pressures from the weaker operating environment in the coming months, Fitch recently downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’ and placed all 10 Nigerian banks’ Viability Ratings and IDRs on Rating Watch Negative. It explained that the resilience of banks’ asset quality, profitability and capital during the economic downturn would influence, among other considerations, how it resolves the Rating Watches.
Meanwhile, reports have it that commercial banks are set to begin the recovery of N6.125 trillion borrowed by oil firms to braze themselves amidst the sector’s recapitalisation fears. The banks have reportedly issued correspondences to oil firms, marginal filed operators and downstream operators, as debts in the sector, according to a 2018 CBN financial stability report, showed that N1.235 trillion had been added to the sector’s debt profile since 2016 when it stood at N4.89 trillion.
“Banks are beginning to takeover collateral tied to the loans,” says a management staff of one the marginal field oil firms as banks followed up on the correspondence sent to his firm.
From the foregoing, only miracles and astute economic management can wriggle Nigeria out of the impending meltdown.
