Q2 loan book growth belies drop in interest income

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As a result of the shutdown, many businesses were unable to carry out activities to generate income; this meant an increase in default risk on loans given out by banks amid the minimum LDR regulation set by the CBN which saw total loans grow by 5.7% q/q in Q4’19 and 5.7% q/q again in Q1’20 to ₦18.56 trillion.

Interestingly, gross loans continued to grow in Q2, most likely as a result of the measures put in place by banks to expand their loan books in the wake of the CBN’s policy. Industry loan book grew by 1.8% in Q2 to ₦18.90 trillion, bringing total loan book growth to +7.6% ytd.

Despite this, there was an average decline in Net Interest Income across our coverage, even accounting for the slump in Interest Expense brought about by the current yield environment which masked the severity of the drop. Net Interest Margins (NIMs) worsened by 7.4% on average across our coverage banks, with the worst hit among them being ZENITHBANK (-2.6% q/q), ACCESS (-1.0% q/q) and UBA (-1.0% q/q).

Looking forward however, we expect to see an improvement in banks’ NIMs in the second half of the year, brought about by the CBN’s new policy on interest rates for savings accounts. The new policy states that banks are to offer a minimum of 10% of Monetary Policy Rate (12.5%) as interest on savings accounts, a reduction from the previous minimum of 3.5%. In our view, this should favour banks with high CASA ratios, four banks within our coverage having a ratio above 75%: GUARANTY (86.7%), STANBIC (80.4%), UBA (78.5%) and FCMB (77.3%). Thus, we foresee further moderations in interest epense by FY’20.

Q2 loan book growth belies drop in interest income
Sources: NBS, Company Disclosures

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Is the worst over for loan loss provisions, or is there more to come?

Among our coverage banks, Loan loss provisions went up 115% q/q, with two banks bearing the brunt of the effect in nominal terms- ZENITHBANK and FBNH both reported provisions of ₦20 billion in Q2 alone. Even banks with historically low provisions reported extraordinary surges q/q such as Guaranty (+353% q/q; Q2: ₦5.5 billion) and STANBIC (+126% q/q; Q2: ₦4.4 billion).

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However, this surge in provisions was actually not the worst case scenario, thanks to the approval of the CBN for the restructuring of 40% of industry loan book (about ₦7.5 trillion) which meant that a large proportion of Stage 2 (Doubtful) loans were given new repayment tenures or different interest charges to ensure continued payment. Without this, industry provisioning would have likely been almost double the current figure.

Thanks to this strategy, we do not expect provisions to worsen significantly in H2, as the economy continues to open up and business activities resume.

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Q2 loan book growth belies drop in interest income

Sources: NBS, Company Disclosures

We maintain our FY’20 NPL forecast

Predictably, NPLs grew 14.4% ytd to ₦1.19 trillion, a 40bps worsening in NPL ratio (6.4%). However, as a result of the aforementioned policies, banks were able to delay the reclassification of some Stage 2 loans into Stage 3 (Non- Performing). On a sectoral basis, Oil and Gas (22.s%), General Commerce (14.2%) and Construction (13.8%) contained about 50% of total NPLs. Among our coverage banks, we actually witnessed a slight improvement in average NPLs from 5.5% as of FY’19 to 5.4% as of Q2’20. This is understandable, as the majority of loans that were restructured were from banks within our coverage.

Furthermore, we noticed a difference between this oil-price crash and that of 2016/17 which saw industry NPLs reach as high as 15.1%, this was due to the fact that a larger proportion of loans wer foreign currency denominated, leading to a higher impairment when oil prices crashed and the currency was devalued.

This time, the banks have shed most of their foreign currency loans (FBNH still has some on its books) which has helped the banks to avoid recording revaluation-related impairments, whilst the scarcity of US Dollar has not affected asset quality as badly as 2016/17 Looking forward, we do not expect a significant worsening of either industry NPLs (FY’20: 6.7%) and coverage NPLs (FY:20: 5.9%) due to the expected recvovery in economic activity, rebound in crude prices and the restructuring.

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Q2 loan book growth belies drop in interest income
Sources: NBS, Company Disclosures

Q2 loan book growth belies drop in interest income
Sources: Company Filings, Vetiva Research

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Q2 loan book growth belies drop in interest income - Brand SpurQ2 loan book growth belies drop in interest income - Brand Spur

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