FREE

Banking Sector Update: Provisions - catastrophe avoided or just beginning?

Provisions: catastrophe avoided or just beginning?                                                         

With all banks’ H1 results finally released, we sought to ascertain the net effect of the economic slump on the performance of banks within our coverage. The Nigerian economy contracted 6.1% y/y in Q2’20, mainly caused by the lockdown in major cities in the country. However, unlike other countries that imposed full-scale lockdowns, economic activity was not completely halted. This meant that, although a large section of the economy was effectively closed for much of the quarter, economic activities- and by extension banking activities- continued in some form.                                                           

Q2 loan book growth belies drop in interest income

As a result of the shutdown, many businesses were unable to carry out activities to generate income; this meant an increase in default risk on loans given out by banks amid the minimum LDR regulation set by the CBN which saw total loans grow by 5.7% q/q in Q4’19 and 5.7% q/q again in Q1’20 to ₦18.56 trillion. Interestingly, gross loans continued to grow in Q2, most likely as a result of the measures put in place by banks to expand their loan books in the wake of the CBN’s policy. Industry loan book grew by 1.8% in Q2 to ₦18.90 trillion, bringing total loan book growth to +7.6% ytd.                 

Is the worst over for provisions, or is there more to come?

Among our coverage banks, Loan loss provisions went up 115% q/q, with two banks bearing the brunt of the effect in nominal terms- ZENITHBANK and FBNH both reported provisions of ₦20 billion in Q2 alone. Even banks with historically low provisions reported extraordinary surges q/q such as Guaranty (+353% q/q; Q2: ₦5.5 billion) and STANBIC (+126% q/q; Q2: ₦4.4 billion). However, this surge in provisions was actually not the worst case scenario, thanks to the approval of the CBN for the restructuring of ~40% of industry loan book (about ₦7.5 trillion) which meant that a large proportion of Stage 2 (Doubtful) loans were given new repayment tenures or different interest charges to ensure continued payment. Without this, industry provisioning would have likely been almost double the current figure.