Against the hyped threat to banking sector stability arising from credit to the energy sector, there are indications that banks are not only recovering from the 2015 red lines, but some of them are now stepping up their positions strategically in the sector.
Relative to the second half of 2015, the amount of credit to the various sectors by banks in first half of 2016, H1’16, showed an upward trend.
Total bank loans and advances to the private sector of the economy grew by 17.62 per cent to N15.7 trillion at the end of H1’16, in contrast to the decline of 1.44 per cent at the end of the second half of 2015. Credit to the oil and gas sector accounted for the highest share of total credit, as it accounted for 28.78 per cent of the total, compared with 24.82 per cent in the second half of 2015. The manufacturing sector came distant second accounting for 12.95 per cent (in decline), compared with 13.91 per cent in the second half of 2015.
The huge exposure of banks to the oil and gas sector coupled with the low price of crude oil in the international market had generated concerns especially regarding the capacity of the obligors to meet their obligations. To proactively address these concerns, Vanguard learnt that a review of the exposure of banks to the sector was conducted and appropriate actions implemented both by the Central Bank of Nigeria, CBN, and the banks themselves.
Following the review and in line with the provisions of the Prudential Guidelines of July 2010, a sizable number of the facilities were downgraded and re-classified as non-performing
with additional provisions effected. The banks’ books were cleaned of the toxic assets, enabling a healthy new start with the industry leaders dominating the field more strategically.
At the backdrop of this development is also some positive swings in the energy sector both domestic and international.
Petroleum Minister, Dr. Ibe Kachikwu, has indicated that despite skirmishes over peace talks on Niger Delta restiveness production has been ramped up to 1.9 million barrels per day, from this year’s low of about 1.4 million.
In the international market, oil prices have been firming up since last week at the backdrop of OPEC’s output cut. A breakeven is achieved at about $45 per barrel, and as at last weekend prices have gone beyond that.
Some of the leading banks including Zenith Bank, UBA, Guaranty Trust, Access Bank among others, are now positioned to play leading roles in revitalizing activities in the sector.
Zenith is said to have proactively put in place some guide against bad loans as price of crude oil headed south. Consequently, it hedges against drop in crude oil price for customers with loans; the bank encouraged customers to increase production capacity to generate more cash flows while they are advised to diversify into gas production. Where necessary, restructuring of loans in line with expected cash flow are effected.
Zenith Bank advanced loans to DISCOs located in high cash generating areas like Ikeja and Eko DISCOS
Zenith Bank is said to be deploying its strong earnings capacity and growth, solid and liquid capital base, strengthened Enterprise Risk Management (ERM) practices and excellent customer service to stay on top of the energy sector banking.
The bank controls a significant share of the high end corporate clients in strategic sectors of the Nigerian economy, using its strong balance sheet and liquidity position as well as efficient trade finance processes and services, to continuously grow and support businesses. The robust ERM had ensured that despite the tough operating environment, Non-performing Loans, NPL, ratio at 2.3 per cent as at September, 2016 stayed at one of the best industry positions with a coverage ratio of about 110.3 per cent.
Also the bank leverages its multilateral financing partnerships to support the businesses in the energy sector. Zenith Bank and the French Development Agency (Agence Francaise de Development ), operator of France’s bilateral development finance mechanism, have a US$100 Million power sector credit facility.
The on-lending term loan being made available to Zenith Bank is to support new investments in the CAPEX (capital expenditure) of electricity Distribution Companies (DISCOs) in the power sector in Nigeria.
Related to this is the bank’s partnership with the U.S. Agency for International Development (USAID) and other parties in an agreement to make available $90 million in new private sector financing for the Power Africa Fund, the first of its kind in Nigeria.
The bank also has bilateral agreement with the International Finance Corporation (IFC), a member of the World Bank Group, to provide a $100 million loan facility for Zenith Bank to increase it’s lending capacity to the various economic sectors.
In the third quarter 2016, Zenith Bank had stepped up its credit to the Upstream segment of the oil & gas to 12.5 per cent of the total loan portfolio, as against 9.0 per cent in 2015. It has also stepped up credit to power sector from 4.1 per cent to 4.2 per cent of total loans.
The bank has listed Petrochemical segment of the oil & gas as one of its key growth target sectors in short to medium term.
Access Bank has a well-diversified loan portfolio, with continued focus on investment grade obligors
Net loans and advances grew 30 per cent to ¦ 1.84 trillion as at September 2016 from ¦ 1.41 trillion in December 2015. The Naira depreciation represents 16 per cent of this growth, while government on-lending loans accounted for 8 per cent of total loan growth.
NPL ratio of 2.1 is also among the best in the industry in the face of energy sector related industry bad loan portfolio.
Access Bank has stepped up its loans to practically every segment of the oil & gas sector in 2016. Loans to downstream has been increased to 9.9 per cent of the total as at September 2016, up from 9.6 per cent in the corresponding period of 2015, while loans to upstream has been stepped up to 5.7 per cent from 4.2 per cent in 2015.
Similarly, the bank increased its loans to oil & gas services to 10.9 per cent of the total as at September 2016, up from 8.1 per cent in the corresponding period of 2015, while loans to refineries were up to 2.3 per cent from 2.0 per cent.
Guaranty Trust Bank
Guaranty Trust Bank had always diversified its loan exposures. However, depreciation of the Naira led to growth in the oil & gas contribution as a proportion of total loans and advances.
The increase in contribution resulted from conversion of the foreign exchange components of the loans to Naira, and no material forex loan were consummated in 2016.
Also the exchange rate movement weighed heavily and offset the impact of the loan repayments in the oil & gas sector.
However, in H1’16 oil & gas sector lendings, at 36 per cent, took a huge proportion of the bank’s total N1.56 trillion loan portfolio. Particularly, Upstream loans alone took the lead with 24 per cent of the total.
Gross loans to the energy businesses moved to N898 billion in September 2016, up from N554 billion in the corresponding period of 2015.
Significantly noteworthy is that deposits generated from the energy sector more than doubled, moving up to N539 billion from N265 billion.