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Oil slump: Banks face financial distress

By on January 25, 2015

Falling oil price, which is expected to hit the economy harder later in the year, will make some weak banks to run into financial distress, it has been learnt.

Financial distress is a term in corporate finance used to indicate a condition when promises to creditors of a company or bank are broken or honored with difficulty, according to Wikipedia. It says if financial distress cannot be relieved, it can lead to bankruptcy.

Top bankers told our correspondent on Thursday that some financial institution had started seeing signs that the year would be very difficult owing to the falling oil prices.

The development, they said, might make profits in some banks to tumble within the third and fourth quarters of the year.

“This year is going to be very difficult from what we are seeing already; some banks will run into financial distresses but I don’t think any bank will collapse,” a top official of one of the top banks said.

Analysts had said that a number of regulatory measures aimed at stabilising the economy would also make it difficult for banks to make higher profit this year.

The Managing Director, Afrinvest West Africa Limited, an investment advisory firm, Mr. Ike Chioke, said reduction in banks’ fee income would make the year a turbulent one for the financial institutions.

He said, “It is going to be very challenging for the banking sector this year. You remember a gradual progression of the CBN trying to reduce the fee element that the banks do enjoy. The Commission on Turnover for example has been reduced from 5 to 3 and one per mille. By 2016, it will be reduced to zero.”

“The CBN has also come up with a lot of measures to control the foreign exchange. All of these are taking away the fee incomes that the banks would ordinarily have enjoyed. So, I see that some banks will be in a place where their cost structure may be too difficult for the income generated to carry. So, they will have to find new ways to generate additional income.

“But trying to find new ways to generate additional income in an environment where there is declining revenue overall for the federal, state and local governments is going to be very difficult. It is going to be a depressed year for the banks.

Good ones may probably report something closer to 2014 if they are lucky but the 2014 results have yet to released; the 2014 result is probably going to be weaker than 2013. So, it will be a hard time. If the banks are having difficulty, you would expect that the rest of the economy.”

The Managing Director, Asset Management Corporation of Nigeria, Mr. Mustafa Chike-Obi, had recently said falling oil prices would cause “serious economic headwind” this year and that banks would be forced to record very significant increase in the non-performing loans in their books.

Chike-Obi said, “We can see that there is an economic headwind coming to Nigeria this year; and when the economic headwind comes, it will certainly impact on the Non-Performing Loans levels. So, we expect an increase in the NPL levels this year.

Fitch Ratings had in a report released on October 8, 2014 said that although the banks’ NPLs were below five per cent as of last year, it would not be sustainable in the long run. This, it said, was because regulatory measures by the CBN might make the NPLs to rise further this year.

Fitch, in the report, also said actions aimed at protecting the economy and the banking system by the CBN would make the profits of the Deposit Money Banks for this year to drop.

 

[Punch]