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Nigeria: Banks halt lending to economy as bad loans shrink

Economic growth in Nigeria has recovered slowly in the last two years

MON, FEBRUARY 25 2019-theG&BJournal- Nigerian banks have refused to lend to the economy while bad loans continues to ebb, and experts do not see them extend credit in 2019 because yields are still relatively attractive.

Banks lost appetite for lending when a precipitous drop in crude price in mid-2014 hindered customers from paying interest on money borrowed.

But the introductions of the new foreign exchange regime by the central bank and interest income from short term government securities have been underpinning their earnings in the last two years.

Banking sector credit to the economy declined 2.9 percent quarter on quarter from N15.6 trillion in the third quarter of (Q3) of 2018 to N15.1 trillion in the fourth quarter of (Q4) of 2018 according to data from the Nigerian Bureau of Statistics’ (NBS).

On a year on year (y/y) basis, total banking sector credit to the economy declined 2.5 percent to N61.7 trillion in 2018 from N63.3 trillion in 2017.

Banks bad loans have been improving since the country exited a recession in 2016, while there has been an improvement in impairments on financial asset.

Non-Performing Loans ratio (NPLs) of the banking industry fell by 2.50 percent to 11.70 percent- lower than the CBN’s 5.0 percent threshold- in the fourth quarter of 2018 from 14.20 percent in the second third quarter of 2018.

Total NPLs stood at N1.8tn for Q4 2018 down by 20.2% from N2.2tn in Q3 2018, according to the statistics body.

Analysts at CSL Stock Brokers Ltd are of the view that banking sector credit the real economy will remain subdued for as long as yields on government instruments remain as attractive as they are. Even in the event of a moderation in yields on fixed income instruments.

“Many banks believe that as long as yields remain above 10%, they still remain attractive considering that fixed income instruments have no Capital Adequacy Ratio (CAR) implications, are tax free and do not result in NPLs. Little wonder NPLs are moderating with decreasing loans to the real economy,” said analysts at CSL Stock Brokering Ltd.

Yields on one year security stood at 17.12 percent, but this compares with 22 percent in 2017.

The cumulative loans and advances of 13 largest banks that have released third quarter 2018 results fell by 4.66 percent to N13.70 trillion, from N14.37 trillion the previous year, according to data gathered by Markets Intelligence.

The fastest loan growth was recorded in 2013 and 2014 when loans and advances were up 21.78 percent, a period before the recession.

“Partly driven by the impact of IFRS 9 implementation on credit portfolios (following the one-time write off), as well as a still cautious stance on risk asset creation, average loan book growth across our coverage was negative for most of 2018, with loan portfolios down -4% on average as at 9M’18,” said analysts at Vetiva Capital Management Ltd

However some industry experts say banks could be motivated to extend credit to the economy if the macroeconomic condition improves.

Nigeria’s economy received a positive performance report, with the gross domestic product (GDP) growth at about 2.38 percent in the fourth quarter of 2018, the Nigerian Bureau of Statistics (NBS) said on Tuesday.

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