Peter Amangbo, Group Managing Director, Zenith Bank; Uzoma Dozie, Managing Director, Diamond Bank: Interview

Interview: Peter Amangbo; Uzoma Dozie

Does the macroeconomic climate present a risk of higher non-performing loans?

PETER AMANGBO: The challenging macroeconomic climate presents a medium level of risk in terms of higher levels of non-performing loans. It is important to note this is not the first time Nigeria’s economy has gone through a difficult spell, and the banking industry must prepare adequately to manage this risk. A major threat to the economy is the limited supply of foreign currency. This risk varies on a business-to-business basis, as many firms are not import dependent and to some extent may not be affected by the limited supply. If a firm is an industry leader or earns foreign currency, then this risk can be largely mitigated, but for those that do not check these boxes, alternative ways must be found to adjust to the environment.

From the banking industry’s perspective, we must continuously review each customer individually and examine how they can liquidate their foreign obligations as quickly as possible.

WIGWE: Today’s economic conditions will create pressure on many banks’ balance sheets. Nigeria relies on oil exports for the majority of its foreign currency inflows. Oil sales also impact the level of the Central Bank of Nigeria’s (CBN’s) reserves, which in turn determine the amount of imports Nigeria can substitute.

When Nigeria was part of JP Morgan’s investment index, there were greater inflows of foreign investments, and though the supply of hard currency has dried up, demand remains high. Manufacturers reliant on imported raw materials for production will be hard pressed by the shortage of foreign currency. A second consideration is the banking sector’s exposure to the oil and gas sector. Some loans may have to be restructured; perhaps a loan that would have taken four years to repay will now take eight years. There is also still uncertainty about where the price of oil will ultimately settle. Despite the challenging climate, regulators have intervened quickly, and banks have been proactive in their preparations.

Compared to the 2008 financial crisis, Nigerian banks now have a far greater awareness of market risks, currency risks and reputational risks. The Basel I and II reforms have also ensured safer levels of capital adequacy to cover various risks.

UZOMA DOZIE: The current challenges increase the chances for non-performing loans to materialise, especially if a downturn lasts longer than two quarters. Depleting cash flows mean that principle interests are not being paid, and the value of collateral is decreasing. We have seen this happen in the construction sector, as many firms are owed large sums by the government. These companies will eventually get paid their dues, but the question of when remains uncertain.

As banks have a 12-month reporting cycle, debts that will be paid in one to three years do not help the current situation and add to the possibility of more non-performing loans. A challenge in the past few years has been for the government to efficiently release money for projects.

This bottleneck has been addressed by the Treasury Single Account, which allows quicker deployment of public funds. More broadly, the minister of finance, Kemi Adeosun, is trying to close all public sector leakages. If the government can show that all public agencies that generate income are paying into the federal account, the administration will have more funds and credibility.

ADEDUNTAN: There is a strong correlation between an economic slowdown and higher rates of NPLs in the banking sector. For the better part of 2015, access to foreign exchange (FX) was quite limited, though in mid-2016 the Central Bank of Nigeria liberalised the FX market, which