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Banks face risk from oil price slump

By on January 1, 2015

With the exposure of banks operating in the country to the oil and gas industry, the plunge in global oil prices poses risks to the lenders, Ecobank Research has said.

It said the $50 per barrel plunge in oil prices since June 2014 presented “benign balance sheet risks to Nigerian banks, but the plunge may take a bite out of banks.”

“Taking into consideration all the demand/supply dynamics, we forecast an average price of $65 per barrel in 2015. That price level may trigger a tempering of the oil and gas sector’s capital expenditure programmes, which in turn may take a bite out of planned capex borrowing from banks.

Nigerian banks have grown their exposure to the oil and gas sector following the 2008/09 banking crisis. This growth has been driven by the exit of international oil companies from onshore production and the resultant entry of local indigenous players (marginal oil field operators).

Upstream exposures account for more than half of banks’ overall exposures to the oil and gas sector. At the close of the third quarter of 2014, upstream exposures among the top ten banks stood at 13 per cent on average terms, compared with the average exposure to the sector of 24 per cent.

At the close of third quarter, downstream exposure accounted for a third of banks’ overall exposure to the oil and gas sector. Downstream exposure mainly consists of inventory financing since Nigeria imports refined petroleum products.

First Bank of Nigeria has the highest exposure to the oil and gas sector (40 per cent), GTBank (28 per cent), Fidelity Bank Plc (28 per cent), Skye Bank Plc (27 per cent) Access Bank Plc and Diamond Bank Plc (25 per cent).

Others are Zenith and Ecobank (18 per cent), UBA (16 per cent) and FCMB (14 per cent).

Analysts at the bank, including Mr. Dolapo Oni, said the upstream oil sector presented benign risks.

“Banks’ upstream exposures are mainly to international oil companies, and we believe lending to IOCs is not only properly collateralised but also that IOCs have the balance sheet muscle to plug any possible cash flow gaps.

“On the downstream side, where we believe there is significant exposure, and where the exposures are mainly comprised of inventory financing, the risks are also benign because pump prices are fixed.”

They said the exposure to marginal oil field operators, however, presented some medium-term risks.

This, they said, was primarily because the banks did not have the balance sheet muscle to plug any possible cash flow gaps.

“As a result, banks will have no choice but to downgrade and restructure some of these accounts. Additionally, the plunge in oil prices exposes banks to refinancing and re-pricing risks, stemming from the fact that oil and gas clients are the biggest source of non-interest bearing foreign currency deposits (mainly through domiciliation),” according to the Ecobank report.

“For now, we believe the 8.4 per cent devaluation of the naira does not present any conversion risks; however, a further devaluation of the Naira could trigger immediate crystallisation of such risks,”   it added.

On November 25, 2014, the Central Bank of Nigeria tightened its monetary stance and raised the monetary policy rate by 100bps to 13 per cent and devalued the naira against the dollar by 8.4 per cent to 168.

 

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