People & Money

Covidnomics: What Will Happen to Banking in Nigeria?

The lockdown of the economy to control the Covid-19 pandemic has greatly reduced economic activities. Virtually all businesses have experienced a drastic decline in revenue. The oil price has crashed even further than the revised budget benchmark, hovering around $20, while manufacturers and other importers have been hit by a shortage of foreign currency and the rapidly declining value of the naira (now around N430 to the dollar on the black market, compared to N360 in December 2019).

As the economy reopens on May 4, 2020, measures to control the spread of the virus will be a drag on activities. Businesses in sectors like aviation, hospitality, and entertainment (hotels, bars, restaurants, and nightclubs) are likely to remain largely closed. Others may partially retain remote working. The curfew in Lagos and Abuja (from 8 pm to 6 am) may lead to businesses adopting shorter working days. What will be the impact of this “slow” or “half locked” economy on banks? We talk to five industry experts to find out.

Aderonke Akinsola, Banking analyst at Chapel Hill Denham response

On average we expect the impact of the expected economic slowdown to be negative for the banking sector. However, some banks will benefit from current macro conditions and see higher earnings, banks particularly with net long foreign currency positions and a strong network of digital banking channels. We expect core loan growth to contract, given the reduced business activity. We see banks being more selective with lending and expect the agriculture, health, and manufacturing sectors to be the target sectors for lending in 2020.

Given increased work-from-home practices and the implementation of lockdown in key economic states, branch operations have been largely skeletal and focused on specific in-branch operations and support functions for the other states that do not have full lockdowns. By implication, banks are having to rely more on IT channels to carry out customer transactions. Banks are also encouraging customers to utilise electronic banking channels With the lockdown and need for social distancing, customers are having to switch to digital banking channels to carry out their banking transactions. This should support increased volume of transactions on electronic banking channels in 2020. This is a possibility that cannot be ruled out and not just for the banking sector as job losses are likely ahead of and during periods of economic slowdown.

Gbolahan Ologunro, a research analyst at Lagos-based CSL Stockbrokers response

It will have a negative impact on the overall performance of the banking sector. The major pressure point will be on their asset quality that stems largely from the fact that banks have a high concentration in the oil and gas sector in terms of their entire loan portfolio. And with the decline in oil prices, we are likely to see higher defaults in terms of the loans that have been extended to the oil and gas sector. That will have a feedback effect on profitability due to lower interest income. And they will also have to make higher provisions for those loans that their default rate has been increased. In terms of capital adequacy ratio as well, we will likely see an increase in risk weighed assets.  How that is computed is when we have total capital divided by risk-weighted assets. So, for the denominator, we are likely going to see a faster increase compared to the numerator. So that will give rise to weaker capital buffers or decline in their capital adequacy ratio. We could see pressure on capital adequately ratios of banks on the back of the fact that their risk weighed asset is likely going to show a higher increase due to the poor macro-economic conditions and higher default rate associated with their loan books.

We expect credit to decline. On one end, banks will be extremely conscious because the macroeconomic outlook is not looking too positive. So now, we will not see banks extending loans to the private sector as we saw in the second half of 2019 due to the regulatory intervention of the CBN. Credit creation will be weak this year compared to last year. And even demand for the loan will be weaker from the private sector. For IT channels, they will experience the impact of the pass-through effect arising from the slowdown of economic activities. Banks e channels, you would begin to see an increased use of digital transactions largely from households. Once, there is a decline in economic activities, companies may begin to lay off workers putting pressure on consumers’ incomes. And as a result of that, we are likely to see a decline in consumer spending. So, if people are spending less, there may not be many transaction activities. And don’t forget that CBN has reduced online transaction fees, and if volumes take a hit, it is going to be a negative for their transaction income systems. They are likely going to record some decent growth in e-banking income, now that people are home, they are forced to use their digital payment systems. So, we may likely see banks benefit from that in the short term but it may be sustained because by q2 most of the lockdowns might have been lifted. I think that banks will loan to FMCGs because you would expect that with the current lockdown imposed, demand for food is on the increase. They would have to double up production to meet demand. So, banks will have to lend to them for the short term. We also have the Health sector companies too.

Emeka Ucheaga. CEO/CIO, EUA Intelligence response

We expect to see a deterioration in the asset quality of banks’ loan portfolios. We estimate that the total oil exposure for Nigerian banks is about N6trillion. If the risk fully crystallizes and we see massive loan defaults in the oil sector, banks will be forced to make large loan loss provisions which will hurt their profitability. Once the oil price meltdown is down is combined with the COVID-19 lockdown, the risk banks face moves from just a problem with oil-related loans to a problem with the entire loan book. Companies, governments, and households will struggle to repay their loans in this new environment. It’s very likely that we see NPLs touching above 20 percent in the industry even after adjusting for restructured loans as permitted by CBN. Banks with a weak capital base could need bailouts to come out of this. It’s the biggest financial meltdown our country has ever faced in its history and we are not sure how many banks will be able to manoeuvre this challenge. Many banks are still yet to meet up with the 65 percent LDR directive. We estimate they may need to create over N1trillion in loans to meet up. The big challenge is creating risk assets in an environment where the chance of risk crystallizing is more than 90 percent and the probability of a recession in 6 months is 100 percent can never be a good strategy for bank survival in this Great Lockdown. So, I expect they may significantly slow down loan creation. Logically we should see at least 10 percent decline in credit growth in the country. Logically, CBN will have to permit banks to default on the LDR directive this year.

IT channels will be the only way banks will able to operate in this lockdown era. We will see a dramatic rise in e-transactions and larger adoption of the platform by more customers who chose to be late adopters or technology skeptics. We don’t expect the current level of e-transaction to be sustained through the year though, some people will most likely return to banking halls post-lockdown. Banks will be happy to save costs through this channel and increase fees generate through this channel throughout this era. If adoption is high like we expect, a lot of jobs could be at risk, and banks will consider closing a couple of branches due to lower traffic in banking halls post-pandemic. A lot of jobs will likely be lost in the banking industry. Several roles may now become non-essential and some roles may be considered overstaffed due to more use of IT solutions and lower traffic in banking halls. Cost-cutting too will be critical for banks this year and personnel expense is typically the largest cost banks face so yes, we expect to see significant job losses in the banking industry. Banks will be funding essential services businesses right now especially FMCG. Interest rates will rise as banks attempt to price in the risk of defaults, inflation, another currency devaluation, and a recession into the loans. Overall, we should see a contraction in bank lending, growth in lending to agriculture and FMCG companies, and stiffer credit lending policies.

 Ayodeji Ebo, MD, Afrinvest Securities Limited response

Due to the lockdown that has reduced activities as well as the sharp drop in global oil prices, we expect impairment charges to spike significantly in the coming quarters. To reduce the impact, the CBN has asked the banks to restructure existing loans. Some of the sectors that may be impacted significantly include Oil & Gas sector loans especially the upstream segment, the manufacturing as well as trade and commerce sector loans. We believe the banks are well-capitalized and stronger, hence should be able to weather the storm. The CBN policy on loan to deposit ratio has made banks increasing loans to the real sector which will boost their top lines and cover-up for the expected income gap on fees due to the CBN downward review earlier this year. Notwithstanding, we expect the lockdown to increase the use of E-channels, hence increased transaction should cover up for the CBN fee cut. Banks are expected to slow down lending this quarter due to economic and policy uncertainties. We have begun to see banks reduce available loans to their customers online due to the COVID-19 crisis that has caused a lockdown in the major cities. However, we expect lending to pick up towards the end of the year when the coast seems clearer.

We have always known that E-channel is the future. GTBank has benefited a lot from this keeping its cost to income ratio below 40 percent, the lowest in the industry. Moreover, the lockdown caused by the spread of COVID-19 has made it more compelling, hence banks that are still behind will have to step up their games. On the customers’ side, the lockdown has also made them see the reason to come on board despite their perceived risk of transacting online. The contract staff will be the category to be affected first as they are not hired under the banks and most of them are customer-facing units. Recall, the CBN has issued circular for banks to inform when they are sacking more than 10 staff, that may protect the permanent staff, but a salary cut may be imminent if business activity slows down. Banks will support the sectors that are not affected by the lockdown like the health and pharmaceutical sector and food. Patronage for these sector sectors will be high in this period, so banks will be attracted to that.

An anonymous staff at Sterling Bank response

The banking sector runs on economic activities. If there are no activities, how will the banking sector thrive? People that are enjoying facilities from the bank, will have challenges paying, so they will be a lot of defaults in loans. So, banks have to restructure their loans for longer terms. Depositors’ money is already fixed. So, depositors do not want to know whether there is COVID-19 or any other negative things. So, when the time is right, they expect the interest on their funds. So, the banks are really strained at this time because they can’t carry out business activities to make interest to pay for these depositors. So, there is a mismatch already. So, it will impact seriously on the banks by eroding the income of the banks because the banks are paying interest on those deposits and it is not making money on loans at this time.  And the salaries of workers have to be paid at this time even if their productively is very low. The only positive thing about this is that more IT channels are been used. More people are going to embrace digital channels. Jobs will be lost obviously because, at this time, banks don’t want to pay for people that are less productive but however they still need to pay salaries for those they can retain. So, some people might go at this time. As they are not making income, they have to reduce their expense so that they can stay afloat. For now, I think Agric, SMEs, personal, and health loans are on the rise.

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