Loan losses to affect banks’ half-year profits

 

The ongoing economic crisis, triggered by the sharp drop in global oil prices, is taking a huge toll on all sectors of the Nigerian economy, especially the banking industry.
Banks’ half-year profits are set to tumble, top banking sources revealed on Wednesday, citing the downturn in the economy as the major reason.
In a few weeks from now, the banks will begin to release their half-year results.
However, top bank executives said the rising non-performing loans had made some of the banks to make relatively large provisions for bad loans in the second quarter of this year in line with prudential guidelines of the Central Bank of Nigeria.
They explained that aside oil and gas as well as power sector loans that had gone bad early last year, a number of loans in other economic sectors, including the manufacturing industry, went bad following the free fall of the naira against the dollar late last year.
The situation became terrible after the free fall of the naira culminated in the devaluation of the currency by the CBN in November last year and February this year.
“The economic crisis has made a significant number of loans with sizeable amounts to go bad. Banks have made provision for these loans and they are reflected in their books. These affected the half-year results of most of the banks,” an official of a tier-1 bank close to the development said.
Stanbic IBTC Holdings Plc last week released its half-year result with a double-digit decline in its profits.
It posted a profit before tax of N9.537bn in the first half of 2015, down by 52 per cent from the N19.946bn declared for the same period in 2014.
The company’s profit after tax for the first six months of this year was put at N9.695bn, which is 40 per cent lower than the N16.184bn recorded in the corresponding period of 2014.
Its gross earnings, however, grew by 11 per cent year-on-year to N68.295bn, while total assets and liabilities increased by nine per cent and 10 per cent to N1.033tn and N911.174bn, respectively.
The company’s unaudited results for the first half ended June 30, 2015, which it filed with the Nigerian Stock Exchange, showed that it earnings per share dipped by 46 per cent to 80 from 148 in the same period in 2014.
Analysts at FBN Capital Limited, in their analysis of Stanbic IBTC’s second quarter results, said the company’s profit before tax fell markedly by 57 per cent year-on-year to N4.7bn.
“The weakness was driven by a seven per cent year-on-year decline in profit before provisions and a significant increase in loan loss provisions to N4bn. To a lesser extent, a five per cent year-on-year growth in operating expenses also contributed,” they added.
Specifically, the weakness in pre-provision profit was due to a 14 per cent year-on-year reduction in non-interest income, the analysts said.
They added, “As for the funding income line, it grew marginally by two per cent year-on-year to N11.4bn. The weakness on the non-interest income line is significant because historically, it has been a strong revenue driver for Stanbic.
“The softness on this line was primarily driven by a 14 per cent year-on-year decline in trading-related fees, which is evident from the macro-driven weakness in the capital markets. Recall that Q1 2015 provisions had surprised negatively. The management stated at the time that this was mainly due to two oil and gas and power exposures. It guided to a cost of risk of less than 1.5 per cent for the year.”
According to the analysts, the company’s first and second-quarter 2015 results imply that the cost of risk year to date is closer to four per cent, much higher than the guidance implies.
“The risk here is that the asset quality situation is worsening faster than the bank expects and expanding into other sectors. We would not be surprised to discover that retail/SME exposures are contributing,” they said.
The Head, Investment Advisory, Sterling Capital, Mr. Sewa Wusu, said banks’ half-year results to be released in a couple of weeks would show that the financial institutions’ profits were under pressure.
He linked the situation to the economic crisis in the country.
Analysts at Afrinvest in their projection for the half-year results of the banks said, “The gross earnings of some banks will be in single digit, while the profit after tax of others will be flat, less than five per cent. For others, their profit after tax will decline. However, we expect some write-backs in the third and fourth quarters to correct this.”
Fitch Ratings, the global rating agency, had last October predicted that banks’ profit would decline this year due to rising NPLs and regulatory headwinds.