Banking On Failure

These are trying times for Nigerian banks. Exposure to the oil & gas and power industry have increased the vulnerability of banks to headwinds from these sectors. Late last year, the Central Bank of Nigeria revealed that average non-performing loan ratio of Nigeria banks soared to 11.6%, compared to less than 5% at the end of 2015. 

According to Bloomberg, Nigerian commercial banks have an average of 30% loan-book exposure to the oil & gas industry. Given the lower price of oil, it is no surprise that many oil companies have struggled to service these loans. 

First Bank of Nigeria, a Tier 1 bank, has seen its non-performing loans ratio skyrocket and is currently one of the highest in the country. Many banks also have high exposure to the power sector due to over $1.3 billion in credit facilities extended to power companies. Numerous operating and legal challenges have hampered the efforts of power companies to meet debt obligations.

Against this backdrop, several Nigerian banks have had to make higher provisions for loan impairments. Again, First Bank Holding Company saw its impairment charge nearly triple to ₦47 billion at the end of 2015. Meanwhile, UBA and Zenith doubled their impairment charges in the same period. Similar trends can be seen across the industry, and 2016 estimates make for even grimmer reading.

Responsibility for this ugly scenario lies with the banks for lax corporate governance and risk management practices, and with the CBN for inadequate supervision. Historically, corporate governance practices at Nigerian banks have been rather poor. Prior to the 2005 consolidation drive which reduced the number of banks from 89 to 24, the industry was bedevilled by fraud, insider loans and lax management practices. 

Corporate governance improved after consolidation but remains beset by some old practices. Gross insider abuses such as granting insider credits resulting in large volumes of non-performing credits are still rampant while internal control and operational procedures are often not adhered to, allowing fraudulent and self-serving practices among members of the board and management.

Skye Bank, a Tier 2 bank, has come under the spotlight in recent times. Concerns over the bank's capital base and liquidity reserves prompted the CBN to dissolve and replace its board in the middle of 2016. The bank’s woes are linked to many factors, in particular to the high volume of insider-related, non-performing loans on its books and its ill-advised 2014 acquisition of Mainstreet Bank. 

The issue of insider non-related loans provides further evidence of corporate governance failings at the bank. A number of bank directors, including the erstwhile Chairman, are reported to owe the bank significant amounts.

Despite all its woes, the bank acquired Mainstreet Bank for ₦126 billion in 2014.  It has now been revealed that the bank used deposits to fund the acquisition, putting depositors’ funds at risk. Given the significant liabilities of both Skye Bank and the acquired bank, it was only a matter of time before the bank felt the weight of all its debt. A review of the bank’s decline shows that the decline could have been avoided with proper corporate governance, sound risk management and firm regulatory oversight.

Perhaps a cause of greater worry is the lax regulatory oversight in the industry. Both the CBN and the SEC have fallen short in their respective regulatory capacities. 

Poor corporate governance practices led to the removal of chief executive officers of five banks in 2009. The CBN thereafter increased monitoring of financial institutions and improved its corporate governance guidelines for commercial banks. But in recent years, the industry has been characterised by a return to the old ways. 

Given the state of the economy – plummeting value of the naira, increasing inflation rates and a recession, the immediate outlook for Nigerian banks looks bleak. This will not come as a shock to industry analysts who have long warned that the focus of lending to big businesses absent adequate risk assessment was dangerous. Also, several banks are still adjusting to life post-TSA, as the sudden withdrawal of public sector funds has hit the industry. 

For the Nigerian banking industry to survive, it behoves on banks to engage in real banking and focus on improving their bottom lines in line with best practices around the globe. Likewise, regulators are needed to perform their oversight responsibilities in a more effective way. 

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