Loan Dodgers Owe Banks N138Bn

Loan default by customers made 13 Deposit Money Banks to lose a combined sum of N138 billion in the 2014 financial year, according to calculations by the Punch Newspaper.

Data obtained from the 2014 annual reports of the banks showed that the various losses were incurred under their respective interest expenses, which were charged against the profits they made in the financial year.

According to the annual reports, five Tier-1 banks, Access Bank Plc, First Bank of Nigeria Limited, Guaranty Trust Bank Plc, United Bank for Africa Plc and Zenith Bank Plc, incurred total loan impairment charges (provision for credit losses) of N64.4bn.

The provisions made for credit losses were Access Bank, N11.7bn; First Bank of Nigeria, N25.9bn; GTB, N7.1bn; UBA, N6.6bn; and Zenith Bank, N13.1bn.

The annual reports also showed that eight Tier-2 banks namely: Diamond Bank Plc, First City Monument Bank Limited, Fidelity Bank Plc, Stanbic IBTC Bank, Sterling Bank Plc, Union Bank of Nigeria Plc, Unity Bank Plc and Wema Bank Plc, incurred N73.6bn as total provision for credit losses.

Diamond Bank made provision for N26.4bn credit loss; FCMB, N10.6bn; Fidelity Bank, N4.3bn; Stanbic IBTC Bank, N3.2bn; Sterling Bank, N7.4bn; Union Bank, N6.6bn; Unity Bank, N15bn; and Wema Bank, N0.1bn.

The Punch reported that banks are required to make provisions for loans whose recovery has come under certain degree of probability. The provision is usually charged against the income or profit made for a given period.

It is termed loan impairment charges or provision for credit losses in their financial statements.

According to wikinvest.com, the International Financial Reporting Standards require a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans, which requires the incorporation of the time value of money relating to recovery estimates.

Also under the IFRS, future recoveries on charged-off loans are accrued for on a discounted basis and a recovery asset is recorded.

Financial and economic analysts said the amount for loan default lost by the banks was relatively high compared to the total profit the banks made in the financial year under review.

They estimated that N138bn loss by the 13 banks was equivalent to over N10bn loss for each bank, noting that this was high for any bank.

The Managing Director, Cowry Asset Management Limited, Mr. Johnson Chukwu, said, “I think the provisions have actually increased because of specific industry challenges. The Nigerian banks are heavily exposed to the oil and gas sector as well as the power industry.

“Banks financed oil well and other activities in the upstream sector; with the decline in oil prices, the banks will have to make some provisions. In addition, the devaluation of the naira has made players in the downstream oil sector to find themselves in very difficult situations. The banks will need to make provisions in these areas too.”

Chukwu said the banks financed the power sector privatisation and with the gas supply challenges facing the power firms, most of the loans had started having issues.

According to him, there is a need to check the trend in order to mitigate the rising amount of non-performing loans in the banking sector.

The Head, Research and Investment Advisory, Sterling Capital, Mr. Sewa Wusu, said, “Default rate is high because users of funds are getting loans at very high rates from the banks, with some customers getting loans at between 28 and 30 per cent.

“The manufacturing companies are operating under a very difficult condition, including high cost of transport and other inputs. They may not be able to generate enough earnings to meet up with their obligations. The government needs to improve the business environment.”

Corroborating Wusu’s view, the Head, Investment and Research, BGL Plc, Mr. Femi Ademola, said the banks ended up with huge provisions for loan defaults due to high interest rates and other business risk factors.

He listed these risks to include falling oil prices and unstable exchange rate.