LEADING Financial Services Corporation,
Based on certain assumptions,
'We estimate that our universe of banks would write-off about 26.6per cent of their loan books (on average) between Financial Year (FY) 2020-2024, which is nearly double the level of write-offs during the previous two cycles.'
However, the corporation noted that if there is a rapid recovery in the global economy, which could result in a significant bounce back in oil prices and subsequently lead to better-than-expected asset quality metrics, the above scenario is extremely unlikely based on current available data, adding that there is still a possibility that the macro-economic shock could be lower than expected.
'Thus, in our optimistic scenario, our assumed asset quality metrics translate to an average write-off of 7.1 per cent of the loan books of our banks. This is lower than the average write-off of 11.3 per cent during the previous two cycles. Under this scenario, we assume the average Non-Performing Loan (NPL) ratio increases by a modest 40bps Y-o-Y to 6.8 per cent in FY20e, before gradually declining to 4.8 per cent by FY24e,' the report read in part.
The Nigerian banking system has been through two major asset quality crisis in the past twelve years. They are: the 2009-2012 margin loan crisis, which resulted in the sector NPL ratio spiking from 6.3 per cent in 2008 to 27.6 per cent in 2009, and the 2014-2018 oil price crash crisis, which resulted in the NPL ratio spiking from 2.3 per cent in 2014 to 14.0 per cent in 2016.
The firm noted that within its coverage universe of banks, the NPL ratio spiked from an average of 6.1 per cent in FY08 to 10.8per cent in FY09 and from 2.6per cent in FY14 to 9.1 per cent in FY16.
It said, given the weak balance sheet positions of the regulator and the
Moreover, these risks have been compounded by the
Given the numerous uncertainties (the pandemic, macroeconomic trajectory and regulatory response), 'we have modelled three different asset-quality scenarios for our banks, which in turn have differing implications for the banks' capital adequacy, growth rates and profitability.
According to the corporation, in the event that the pandemic ebbs away and macro-economic activity rebounds rapidly, 'we think there is a possibility that the deterioration in credit quality will be far less pronounced.
'Thus, in our optimistic scenario (five per cent probability), we assume the average NPL ratio of our banks would increase from 6.4 per cent in FY19 to 6.8 per cent in FY2020 and moderate to 4.8per cent by FY2024.'
Under this scenario, it estimates the average cost of risk will spike to 4.2per cent in FY2020 before easing to 2.4per cent in FY2121 and average 0.9 per cent thereafter through the rest of its forecast period.
© Pakistan Press International, source