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High voltage currency shocks banks.

Oil prices, oil production, the naira's devaluation, the rise in non-performing loans, the harsh realities of certain Government policies-the list goes on, but what happens now to Nigerian banks and the economy?

When an economy is in crisis, it is difficult to point to one dominant factor in the decline. Nigeria, now officially in a recession, is no exception.

According to the National Bureau of Statistics (NBS) the economy contracted by 0.36 per cent in the first quarter of the year and 2.06 per cent in Q2, the largest contraction in 49 quarters. With two subsequent quarterly contractions, Nigeria is now officially in a recession.

In a speech at the National Institute of Policy and Strategic Studies on 2 September, days after the recession was announced, Central Bank of Nigeria (CBN) Governor Godwin Emefiele said that, "developments over the last two years show that these are not normal times by any stretch of imagination" but that the CBN has always acted 'in good faith'.

Responding to criticism of the Bank's recent regulations, he said, "When you have policies that people are praising, that means such policies are not really good, because the people praising the policies know that they can circumvent them. But if people criticise your policies, especially in Nigeria, such policies are good; the people criticise them because they know that they cannot circumvent them."

There are several policies Emefiele may be referring to, from the 15 June decision to de-peg the naira from 197/USD, to the 2 August block of remittances from all money transfer operators but three (more in box out 2). The same day the naira floated, the Bank also barred multiple banks from participating in the foreign exchange market, and put pressure on all of them to remit crude oil sales revenues from entities operated by the Nigerian Petroleum Development Company (NPDC).

Banks have felt the pressure. Though the CBN denied any distress in the system, 4 July saw the entire board and management of mid-tier Skye Bank resign, to be replaced with Central Bank management. According to a CBN statement, Skye had persistently failed to meet minimum thresholds in prudential and adequacy ratios, but the banking system as a whole remained strong; according to our data below, the economy's slow decline before this summer's challenges has already put the sector in a precarious position.

"The economy is moribund, bank credit is contracting and bad loans will spike," BCA Research's Rajeeb Pramanik said in a recent report advising investors to avoid Nigerian stock for the time being. At the time of writing, inflation stood at 15 per cent-but has risen to 17.6 per cent by end-August 2016.

Despite this, Pramanik said that devaluing the naira made sense, "As not doing so was building up distortions in the economy. It was also help put a bottom under Nigeria's fiscal deficits. As such, investors may consider going long/overweight Nigerian sovereign spreads."

Many of the structural issues in Nigeria's fiscal policy and budgeting did not come to light until oil prices dropped. Pramanik says that Nigeria's problem of "over consumption and under-savings" is now more apparent than ever, and it will have a challenging time filling the gap left by oil revenue here.

"Poor productivity gains in particular have been a result of low capital formation in productive capacity and infrastructure," he said, adding that one of the reasons for Nigeria's low savings rate is policymakers' inability to tame chronically high inflation. As a result, banks deposits have earned negative real interest rates for much of the last decade, according to BCA Research.

Banks-weathering the storm?

The data we have collected (found here) on bank's performances compares annual reports from 2015 and 2014, thus does not include this year's rollercoaster of currency movements and credit ratings. However it does include the beginnings of oil price decline, and offers a window into the different banks' positions, strengths and weaknesses before the onslaught of this year's challenges.

As BCA Research noted, several were already in a fragile position last year. "Banks are under pressure from rising bad loans. The non-oil corporate sector in Nigeria entered the 2014-15 downturn with a significantly weaker balance sheet than it did during the 2008-09 crisis," Pramanik said, noting that the interest-coverage ratio of the corporate sector had declined from four in 2008 to two at the end of 2014, according to the IMF.

"Weaker balance sheets are making firms more vulnerable in this downturn, and since they make up 80 per cent of total bank loans, odds are that banks' NPLs will go up significantly from the current 5.3 per cent," he said.

All but one of our included institutions, Access Bank, had assets decline from 2014 to 2016 (Access managed four per cent growth). On net profit, Access leapt 20 per cent, with only United Bank for Africa (UBA) also in the green at one per cent growth. In liabilities, Access Bank was again one of two that saw an increase-two per cent for Access and 11 per cent for First City Monument Bank (though FCMB suffered a 151 per cent drop in net profit).

Overall, this put Access Bank at the top of our ranking for 'Best Bank'-a measurement of the dollar size increase in the above factors as well as revenue-and 'Fastest-growing Bank', the measurement of percentage change across the four factors.

Zenith Bank came second in both categories, with a seven per cent decline in assets and six per cent decline in liabilities coming out to $193.6 million in revenue and $49.4 million in net profit for 2015, or a 12 per cent and 10 per cent drop, respectively.

Several strong banks suffered significant setbacks in 2015, most notably Ecobank Nigeria, the pan-African bank's largest subsidiary. Ecobank's assets dropped 91 per cent compared to 2014, coming out to $96.98 million. Its liabilities were comparatively more stable, with a 15 per cent decline year-on-year, but overall its net profit took a 209 per cent hit at $120 million for the year-putting it 10th in the Best Bank ranking and ninth in Fastest-growing.

Guaranty Trust Bank (GT Bank) fared relatively well, ending 2015 with just a nine and 10 per cent decline in assets and liabilities, respectively, and an overall net profit of $52.4 million that was just 11 per cent behind 2014 numbers. Overall, First Bank of Nigeria (FBN) took in the largest net profit by dollar amount ($424.4 million) but actually suffered the largest drop year-on-year of any of the included banks at 551 per cent.

Moody's assigned first-time ratings to four of the above banks on 15 September, with Zenith, GTBank and UBA all receiving B1 local-currency deposit and issue ratings with a stable outlook, and FBN receiving B2 ratings on the same, with a negative outlook. Moody's noted that Zenith and GTBank's ratings rested on each bank's standalone strength, including robust loss-absorbing buffers, low levels of non-performing loans and their resilient liquidity profiles. UBA, meanwhile, was underpinned primarily by the expectation of Government support as it's a systemically important bank. Similarly, FBN is systemically important and could expect intervention-but is dragged down by a weak loan book and high provisioning costs.

Skye Bank was not included in our ranking due to the unavailability of its 2015 Annual Report and the CBN's ongoing oversight of its operations. Stanbic IBTC and Bank of Industry were also not included for lack of data, but were each reaffirmed in their credit ratings by Fitch on 5 August: Stanbic IBTC Bank at 'AAA' national long-term ratings and Bank of Industry at 'AA+'.

Snapshot: The pipeline problem

Though the oil sector accounts for just 10 per cent of Nigeria's GDP-relatively small for an oil-producing country-it contributed 62 per cent of consolidated Government revenues and nearly 93 per cent of the country's export proceeds in 2014, according to IMF numbers cited by VTB Capital. Low prices are not the only factor in oil's drag on the Nigerian economy-both VTB Capital and Standard & Poor's (S&P) have recently highlighted destructive pipeline vandalism and increasing tension in the Niger Delta as core risks to oil production.

S&P said that while oil price assumptions have remained unchanged since its earlier March review, while oil production levels have declined from an average of 2.1 million barrels per day (bpd) in the first quarter to an average of 1.7 million bpd in the second quarter.

"Oil production in the third quarter has remained weak but may improve in the fourth quarter and next year as the government negotiates with militants and sabotaged pipelines are repaired, mainly Shell's Forcados export pipeline with a capacity around 300 thousand bpd," S&P said.

According to research by Raza Agha, VTB Capital Chief Economist for the Middle East and Africa, there were over 16,000 pipeline breaks in the 10 years to 2015, of which 97.5 per cent were due to vandalism-an estimated 100,000 bpd was stolen in Q1 2013 alone, according to Chatham House data cited by Agha. Countless factions are to blame according to local press, and as ethnic tensions between groups rise, so do pipeline attacks, he said.

Agha advised that besides helping on the security front, the Government may need to reassess policy. "There might also be a need to water down the anti-corruption drive. The resultant peace might well provide a window for oil companies and the Government to ensure investment starts flowing into oil infrastructure," he said.

S&P meanwhile noted that on the fiscal front, the Nigerian National Petroleum Corporation (NNPC) is considering alternative funding models over the next few years. "We understand it plans to clear its arrears this year-about $6 billion [1.5 per cent of GDP] accumulated in 2015-with its international oil companies' joint venture partners. This financing strategy, if passed by the authorities, involves charging the federal escrow account as part of cost of production to clear the arrears to international oil companies," it said.

Snapshot: Central Bank relaxes strict money transfer rule

Following outcries over CBN's 2 August decision to limit money transfer operators (MTOs) to just three companies-Western Union, MoneyGram and Ria-the Central Bank allowed 11 more MTOs back into the market. Though that still limits many businesses from engaging in the Nigerian remittance market, estimated to be $21 billion annually, it alleviates a significant amount of pressure from concerned consumers, operators and banks.

The MTO limit was announced shortly after CBN's decision to float the naira, seen as part of an effort to stem steep devaluation and stabilise the volatile foreign exchange market.

WorldRemit, a digital remittance service, was one MTO let back into the fold. "We commend the Central Bank of Nigeria for reaffirming the country's commitment to building an enabling environment and level-playing field for international money transfer services to Nigeria. Increased competition will help to bring the estimated 50 per cent of remittances to Nigeria that currently go through unregulated, informal networks into formal networks channelled through licensed IMTOs," Ismail Ahmed, Founder and CEO of WorldRemit, said.

"We're grateful to the many Nigerians both at home and in the diaspora that supported our call for money transfers to be restored. A competitive remittance market provides Nigerians with greater convenience and better pricing," he added.

The Nigerian Association of Chambers of Commerce and Industry Mines and Agriculture (NACCIMA) also applauded the CBN's partial turnaround.

"We believe that this policy decision is a step in the right direction in ensuring that remittances from Nigerians in the diaspora remain a viable source of foreign exchange for the Nigerian economy," the organisation said in a statement.

"However, we would like to counsel that the Central Bank of Nigeria reconsiders its stance in its earlier press release-where it stated as follows: [MTOs] are required to remit foreign currency to their respective agent banks in Nigeria for disbursement in Naira to the beneficiaries while the foreign currency proceeds are to be sold to Bureaux De Change operators, for onward retail to end users'," NACCIMA continued.

"It is our view that this policy will put price control and determination in a few hands and create an enabling environment for sharp practices within the forex parallel market. We counsel that beneficiaries of foreign currency proceeds be allowed to determine when they sell their proceeds and at what rate. This will create a situation of multiple supplier/sellers to meet the existing demand in the parallel market and relieve the pressure on the inter-bank window."

The Association expressed concern that the policy would be a disincentive for consumers receiving remittances, which may lead them to consider 'alternatives' that could lead to the continued increase in foreign exchange prices.

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Publication:CPI Financial
Geographic Code:6NIGR
Date:Oct 19, 2016
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