Nigeria’s energy companies that bought oilfields from majors when oil was selling for more than $100 a barrel have been hammered by the crash in prices. Now their troubles are taking a toll on the banking sector in Africa’s largest economy.
In the two years before crude oil prices began falling in mid-2014, Nigerian banks lent an estimated $10bn to local oil and gas companies to buy assets from Royal Dutch Shell, Eni and Total as they retreated from the country’s onshore industry.
At the time these loans were celebrated as a milestone for Nigerian finance and a boost to bank portfolios aimed at supporting greater domestic participation in the industry.
Now that the price of Brent crude has fallen by nearly two-thirds to the mid-$40s, much of that lending has become a liability.
“The banks lent way too much,” said a foreign oil executive who observed the wave of acquisitions in 2012-2014. “The assumptions made by the local oil companies were inaccurate. The value of the assets is basically zero with the low oil price”, he said speaking on condition of anonymity. “The whole system is shaking.”
Five Nigerian banks — First Bank, which is Nigeria’s largest bank by assets, Diamond, FCMB, Ecobank and Skye — have issued profit warnings in the past three months.
Only two of them — FCMB and Ecobank — have issued 2015 results despite the Nigeria Stock Exchange’s requirement that they do so in the first quarter. Ecobank’s full-year post-tax profit was down 73 per cent to $107.5m.
“This is highly unusual going in to the second half of April not to have results from these banks. It’s a pretty big indicator”, said Ronak Gadhia, equity analyst at Exotix.
“They are kicking the can down the road and hoping the oil price will recover” by restructuring the loans, he added.
Most of the country’s 22 licensed commercial banks are exposed to the industry through large syndicated loans, many of which were not hedged, and some of which were poorly collateralised, according to analysts.
In a sign of the times, one of Nigeria’s leading energy firms, Oando, announced in its results statement last month that circumstances “lend significant doubt as to the ability of the corporation to meet its obligations as they come due”. The company bought an oilfield from ConocoPhilips for $1.65bn in July 2014.
Upstream oil and gas and services make up an average of around 28 per cent of the banking sector’s loan books. But Robert Omotunde, analyst at Afrinvest, a Lagos-based investment bank, says at least two banks have made more than 30 per cent of their loans to upstream energy companies — notably First Bank, where oil and gas debt makes up 47 per cent of the total loan book.
In addition to the upstream energy groups, local companies that borrowed in dollars to acquire power plants sold in a government privatisation programme are also struggling to keep up with payments.
There has been “significant restructuring” of energy-related loans since the price of oil began falling, said Adesoji Solanke, head of research for Nigeria at Renaissance Capital.
But for the restructuring, Mr Solanke estimates that the sector’s non-performing loan ratio would be at least 15 per cent. As is, the central bank says the ratio stands at 4.65 per cent.
During the 2009 Nigerian banking crisis, more than 30 per cent of loans were classified as non-performing and the Central Bank of Nigeria was obliged to step in with rescue packages and reforms.
The index of Nigerian bank stocks has fallen by 50 per cent in the past 12 months, far further than the broader market decline of 25 per cent.
“The magnitude of losses have been translated directly into how sentiment has been priced into their stocks,” said Mr Omotunde of Afrinvest.
Diamond bank said last month in its profit warning that deteriorating macroeconomic conditions in the country led it to make “higher than expected impairment charges on loans made to the energy and commercial business sectors.”
“With the reduction of oil prices we have had to extend the tenors of the facilities to reschedule cash flows,” Diamond Bank chief executive Udoma Dozie said in an interview. “We have done it once since the crash, and we were concerned that we might have to look at it again when oil was skirting at $30 [per] barrel.”
Even at today’s prices, most of the energy companies concerned are not profitable.
“The banks are well within their rights to restructure their problem loans”, said a former member of the Central Bank of Nigeria’s monetary policy committee. “Except that some of these borrowers should never have gotten loans in the first place.”
Source: Financial Times
Connect via email
- Nigeria’s Buhari returns home after three-month sick leave in Britain – Reuters
- Naira falls against dollar at parallel market – NAN
- Nigeria strengthening economy attracts forex traders – The Cable
- Permanent secretary forfeits N664m, $137,680.11,properties to FG – THE NEWS NIGERIA
- Naira to weaken further as dollar demand increases – PUNCH