Loan default by customers made 13 Deposit
Money Banks to lose a combined sum of
N138bn in the 2014 financial year, according
to calculations by our correspondent.
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.
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.
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