Drop in Oil Price May Hamper Loans Repayment in Banking Sector

The continuous slide in the price of crude oil, which has led to lower revenues to Nigeria, may also result in strains in the credit repayment ability of upstream oil companies, a report has stated.

The situation may also lead to delay in payments to contractors as well as a possible cancellation or delay of contracts or planned projects in the country.

Renaissance Capital, a financial advisory and investment company stated this in

a 62-page report made available to THISDAY.

It pointed out that there are a number of potential risks that could lead to asset quality issues for the banks, such as price (oil and interest rate) and production risks.

The firm revealed that its discussion with the banks and some operators in the upstream segment revealed that the bulk of credits to upstream/service companies were in forex and considering that their revenues are in forex, there is a natural hedge in place that helps to reduce the potential risk of exchange rate fluctuations.

It was also gathered that loans to the indigenous companies were mostly structured with an assumed oil price of $70 to 75/bl.

“Below this price, certain cash-flow assumptions start getting tested. However, feedback on the break-even price for these loans is a range between $50-55/bl for the most part.

“The banks have hedges in place (although not in all cases), which we understand start to kick in at about the $65-75/bl price levels for the most part. Some upstream companies have hedges in place at much higher prices.

“In the event that oil prices test the break-even levels, a couple of banks expect these loans to get restructured,” it stated.

Furthermore, the firm said feedback from its discussions with the banks over the years had also revealed that the upstream oil and gas exposures were some of the best performing. “Overall, we think that the Nigerian banks have stronger risk management structures in place to mitigate potential risks in the upstream space.

“The increased participation by some international banks such as Standard Chartered and BNP Paribas in domestic transactions points to much better structuring in some of these deals.

“Having said this, given the significantly higher involvement of the banks in syndicated transactions owing to the large size of some of these loans, default by one obligor will affect a string of banks,” it warned.

Zenith Bank Plc had the lowest exposure to the upstream/services segment at 6.5 per cent in its nine months 2014 results, compared to the 3.2 per cent in the comparable period of 2013.

“Speaking to some upstream companies on the banks they believe have a relatively stronger understanding of the risks involved in their business, the following banks were highlighted: GTBank, Access Bank, FBN Holdings, Zenith Bank, FCMB and Stanbic IBTC.

“The recent weakness in oil prices to below $70/bl justifiably raises concerns on its implications for the Nigerian banks, more so because the memories of 2009 and its aftermath are still quite vivid.

“There was also a mild devaluation of the naira in 2011 and another round of oil price weakness in 2012, which put additional pressure on the exchange rate.

“In short, we have seen this picture before but things are somewhat different this time, in our view,” it added.

Thisday