Banks largely exposed to energy sector, says Afrinvest

The concentration of loan portfolio in the banking industry in few sectors poses systemic risk for the economy, according to Afrinvest, a foremost investment banking firm, which released a report on the Nigerian banking sector yesterday.

Looking at the loan portfolio of the industry, the report shows that there is a huge concentration of risk based in the power sector and the oil and gas sector, meaning that the increase in lending does not cut across all sectors of the economy.

Total loans to the power sector in 2013 was about $1.3bn for Discos and $1.7bn for Gencos. Additionally, it is expected that $5.8bn would be the loan figure for FY 2014 to the power sector.

The Afrinvest report further points to the increase in the balance sheet of the CBN from $11.4bn in 2011 to $19.2bn in 2013; with the significant increase coming from AMCON bonds.

This implies that the CBN would be unable to afford a bailout should there be another banking crisis if power sector firms are unable to service their loans

The report shows that

the total loan in the industry is expected to hit N15Tr FY 2014.

In the oil and gas sector, a total of $19.2bn is recorded for loans from 2013 till now.

The report points out that “a significant portion of the funding for the acquisition of the (PHCN) assets by private sector investors was provided by Nigerian banks with minimal equity contributions.

“Banks’ risk assets increased substantially by an average loan growth of 24.1% in 2013, against -14.3% FY 2012.” The report continues.

It will be recalled that the Nigerian Electricity Regulatory Commission (NERC) together with the Central Bank of Nigeria (CBN) came up with a plan to ease the loan repayment burden on the power distribution companies and reset the repayment terms of legacy debts.

The CBN is to offset the outstanding N25 billion gas-related legacy debt owed to gas suppliers by the now defunct PHCN.

In addition, the CBN and the Bankers’ Committee will set up an SPV (special purpose vehicle) to support the gas-to-power programme, through the provision of attractively priced long-term funding.

The bond will be backed by MYTO receipts, with NERC, the power sector regulator, ensuring that a portion of the tariff levied by Discos is allocated towards servicing the bond.

Furthermore, the bonds are to be guaranteed by the CBN, like the AMCON bonds, and pricing is to be the same as for FGN bonds.

The private investors in the power sector have grappled to meet expectations since taking ownership of PHCN assets. This is as a result of gas shortages lowering electricity supply capabilities and the lack of a reliable customer base.

The Afrinvest report also showed that growth in banking sector revenue has become slower over the last couple of years, declining from a high of 50 percent y-o-y in 2011 to 13 percent in the same period in 2013.

However, profit after tax in the industry has showed in a mixed trend as a result of changes in accounting policy from NGAAP to IFRS for impairment charges.

Despite the slower growth, total deposits and total assets have increased in the industry, with six banks controlling 70 percent of the market.

The six banks are Guaranty Trust Bank, Zenith Bank, First Bank, Ecobank, Access Bank and UBA.

Businessday