Banks Face Huge Losses From Trade Finance Loans

Deposit Money Banks are recording huge non-performing loans in their books as a result of credit facilities offered to finance trade transactions, top banking sources have disclosed.
As a result, the banks are expected to record huge losses from the trade financing loan heads this year, aside from those already recorded in the 2014 financial year and the first quarter of 2015.
It was gathered that apart from loans offered to players in the oil and gas sector, trade financing was among the key loan heads from which the banks recorded highest amounts of the NPLs in the 2014 financial year and the first quarter of this year.
This, it was learnt, was because most of the loans advanced by the banks to companies in the trade finance sub-sector were given in foreign currencies, mostly in United States dollars.
The volatility in the exchange rate in the last one year, which has made the Central Bank of Nigeria to devalue the naira twice, banking officials close to the development said, had made it difficult for many lenders to recover a good number of the loans.
“Ours in Nigeria is an import-dependent economy. We have financed importers in several deals and most of the loans were advanced in dollars. With the devaluation of the naira, the exchange rate has changed significantly, and this is making it difficult for many banks to recover these loans because the importers they have financed cannot raise the difference in the exchange rates,” a top manager in a tier-1 bank, who spoke on the condition of anonymity, told our correspondent.
“There are several of these loans in our books and it is a big challenge,” the manager added.
Already, the banks have stopped advancing hard currency-denominated loans to customers owing to the exchange rate volatility occasioned by the falling oil prices and the devaluation of the local currency.
Some lenders are offering very few foreign currency-denominated loans to insignificant number of clients who have income in hard currencies that could enable them to finance repayment.
“Most of these dollar credit lines were offered to finance imports when the exchange rate was at 155, 160 and so on. Although some of them have been re-negotiated, a great number of them are still classified as non-performing loans and are impacting our profits seriously,” another top banker said.
Further findings showed that oil and gas, power and trade financial activities/deals account for a major part of the write-downs (loan losses) that the banks made in the 2014 financial year and the first quarter of this year.
The PUNCH had exclusively reported in May that loan default by customers made 13 DMBs to lose a combined sum of N138bn in the 2014 financial year.
According to data obtained from the 2014 annual reports of the banks, the various losses were incurred under interest expenses, which were charged against the profits made in the financial year.
The reports showed that 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.
Access Bank made a provision for credit loss of 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, set aside 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.
Commenting on the development, the Managing Director, Cowry Asset Management Limited, Mr. Johnson Chukwu, said it was difficult for companies, which borrowed in foreign currencies but had their income in naira to meet up with their repayment terms after major fall in the value of the local currency through devaluation.
He said, “Basically, when a country devalues its currency, it affects many companies, especially those who have obligations in foreign currencies.
“Those who have borrowed in foreign currencies, but have their income in local currency will continue to face serious challenges. Businessmen, who borrowed in foreign currencies and have their income in the local currency will find it difficult to pay. We have people who have financed imports in open accounts. The defaults in forex loans cut across various sectors of the economy.”
Already, Fitch Ratings has predicted that the banks’ non-performing loans will rise this year owing to regulatory headwinds, including the devaluation of the naira by the Central Bank of Nigeria.
The CBN had last November devalued the naira by 8.4 per cent. It also effected some changes in the Cash Reserve Ratio.
Fitch said Nigerian banks’ profits would also fall this year because of actions aimed at protecting the economy, including the external reserves and the exchange rate.
The Director, European, Middle East and Africa Financial Institutions’ team, Fitch, Mr. Mahin Dissanayake, had said, “This is mostly supported by continuing robust economic growth. Nevertheless, we expect bank performance and growth to moderate over the next 18 months due to the Central Bank of Nigeria’s actions aimed at protecting the economy and the banking system.
“Most banks’ NPL ratios remain below the five per cent prescribed by the CBN but Fitch views this as unsustainable in the long run. Very high loan concentrations by borrowers and sectors expose banks, particularly the smaller banks, to significant event risk.
“Banks are also seeing moderate liquidity pressure with rising loans/deposit ratios. In response, the banks’ large customer deposit bases are continuing to expand on strong GDP growth and increasing banking penetration.”

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