Nigerian banks’ IFRS 9 shows asset quality is still weak

Nigerian banks’ recent International Financial Reporting Standard (IFRS) 9 disclosures support Fitch Ratings’ view that asset quality continues to be weak for the sector.

The end-2018 results, the first under IFRS 9, gave new forward-looking information on asset quality. Stage 3 (impaired) loans under IFRS 9 were broadly stable at 9.4 per cent of gross loans at end-2018, helped by recoveries and write-offs during the year as well as more favourable operating conditions. However, high levels of other problem loans and low reserve coverage continue to weigh on the sector and on ratings for all Nigerian banks.

According to Proshare, financial analysts, the IFRS 9 disclosures showed high levels of Stage 2 loans, which exhibit significantly increased credit risk but are not yet impaired. Stage 2 loans weigh on our assessment of banks’ profitability, asset-quality and capitalisation metrics given their risk of migrating to Stage 3.

“The extent of this risk is linked to the direction of Nigeria’s operating environment and particularly to oil prices and production. We combine Stage 2 and 3 loans to generate a ‘problem loans’ ratio, an assessment that gives a better indication of asset quality than Stage 3 loans alone, in our view”, said Proshare.

In Nigeria, Stage 2 loans mostly comprise restructured loans, particularly to the oil and gas sector. They also include loans that are 30 or more days’ overdue and model-driven classifications caused, for example, by credit rating downgrades. Stage 2 loans ranged from 7.5 per cent to 25.7 per cent of gross loans across Fitch-rated Nigerian banks at end-2018, with an average of 16 per cent. Banks with above-average exposure to the oil and gas sector, and those with previously weaker underwriting standards generally reported higher proportions.

Stage 3 loans likewise reflected the weak domestic operating conditions and sluggish economic growth, averaging about nine per cent of gross loans. Stage 3 loans comprise credit-impaired loans, including all loans that are 90 days’ overdue.

Reserve coverage of problem loans (Stage 2 and 3 combined) is weak, averaging 29 per cent among Fitch-rated Nigerian banks at end-2018. This is primarily due to low coverage of Stage 2 loans. While some loans are backed by collateral, but enforcing collateral can be difficult in Nigeria.

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