News Column

Banks Wary of Lending to New Customers

August 13, 2014

Obinna Chima

Five years after a crisis that led to an intervention by the Central Bank of Nigeria (CBN), banks are still wary of lending to new customers as a result of the fear of default, findings have shown.

Financial institutions were more at home to lend to existing customers rather than to new customers as a precautionary measures to tamp down their non-performing loans portfolio.

The Nigerian banking industry's non-performing loans (NPLs) ratio decreased from 34.5 per cent in November 2010 to 3.8 per cent as at the end of March 2014, a feat most analysts attribute to caution and rigorous credit analysis after the 2009 crisis in the industry.

Also, at the end of March 2014, average tier-1 capital to risk-weighted assets of banks stood at 15.4 per cent.

"Commercial banks are still risk averse since 2009 when we had the crisis. Most of them still prefer to lend to higher-end large corporate," a financial market analysts, Mr. Chijioke Obiagwu said.

Five years after the crisis of 2009, the first cyclical constraint banks are dealing with is capital and to a lesser extent liquidity. The problem, according to analysts, is much more acute among the smaller banks than among the five largest banks.

A report by the CSL Stockbrokers Limited, however pointed out that banks are becoming more active in the power sector. In fact, the report which covered the 'big five' banks in the country (First Bank Limited, United Bank for Africa Plc, Zenith Bank, GTBank and Access Bank), showed that the financial institutions have made significant loans to the power sector.

Loans to the power sector typically have grace periods on either interest payments or capital repayments (if applicable), or both, of up to two years. These loans include significant sums lent to purchase power generation and distribution assets.

"Bankers also comment that they are making more loans to the telecoms sector than before, in which we understand companies seek to free up capital through sale-and-leaseback agreements and create infrastructure sharing arrangements with each other.

"FBN Holdings, among the major banks, is the one with the highest exposure to the retail sector, with some 20 per cent of its loan book here. "However, it sees its current lending priorities as lending to the trading sector, telecoms, and the power sector as well as to manufacturing and oil and gas, both downstream and upstream," it added.

According to the report, Zenith Bank, like FBN Holdings, also has strong exposure to the power sector following the privatisation exercise last year. Zenith Bank had lent to three distribution companies, and to two power generation companies.

Its strategy in lending to distribution companies was immediately to capture customer flows associated with settlement of bills and to augment its corporate deposits. Zenith Bank also targets the manufacturing, oil and gas and telecoms sectors as priority areas.

"For a bank to maintain profitability through the cycle, or through several cycles, it needs to make sufficient return on average equity (RoAE) to consistently replenish or increase its regulatory capital, after paying dividends.

The CBN requires systemically-important banks maintain a total capital adequacy ratio (CAR) of 16 per cent. Tier-2 capital cannot exceed 25 per cent of tier-1 (although in the run-up to Basel II implementation it appears that 33 per cent was allowable), which is equity.

This requirement is likely to be become more onerous after the application of Basel II rules later this year which, most banks agree, will lower their CARs by 200-300bps as they provide for operational risk. The CBN has made no announcement about relaxing the minimum CAR for banks.

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Source: AllAfrica

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