Gtbank has said that most banks in the country capital adequacy ratios are below the 15 per cent required standard. The Bank in its Economic review titled Nigeria Macro-Economic and Banking Sector Themes for 2019 said “the impact assessment of IFRS 9 on the industry revealed that the transition to the new standard resulted in lower capital position in view of the shift from Incurred Loss to Expected Credit Loss (ECL) model. In effect, most banks saw between 150-500 basis points (bps) shaved off their capital, resulting in significant decline in the regulatory Capital Adequacy Ratio (CAR) of some banks below the minimum of 15% (and 16% for D-SIBs) bringing to fore the need for these banks to raise fresh capital. In a move to cushion the effect of the ECL provisions on tier 1 capital, the CBN introduced a 4-year transitional arrangement which will require banks to hold static the Adjusted Day One impact of IFRS 9 impairment figures and spread it over a 4-year period. Consequently, capital position of banks will improve relative to the figures that were published for the 2018 reporting periods”.
Gtbank in the report predicted that the Nigeria economic growth will be lower than the 2 per cent predicted by IMF and World Bank. It said that the Nigerian Economy will grow by 1.9 per cent in 2019. Giving reasons for its lower growth projection, it said “in the wake of normalising interest rates, uncertainty in the oil market, slowing global economy and capital flight from emerging markets, Nigeria’s economic performance will be largely dependent on the interplay of these external factors especially the global oil market in a year that will be split into two halves. The first half will see politics and electioneering dominate much to the detriment of economic activities which may translate into muted capital inflow, increased pressure on the Naira, accelerated FX intervention and declining external reserves.
“We expect some level of normalcy to return in the 2nd half of the year translating to strengthened investor confidence, increased capital flows, softened pressure on the Naira and decreasing yields on government securities as well as the likelihood of increased inflationary pressure. That said, the continued normalisation of interest rates by the U.S. FED, lower oil prices, weaker-than-expected oil output and a tense post-election environment pose downside risks to our expectations”. According to the Bank “contrary to projections about the expected rate of economic growth in 2019, which include predictions of 2.0 per cent and 2.2 per cent by the IMF and World Bank respectively, we believe growth will be slower, nearing 1.75 per cent in 2019. We expect that electioneering will dominate fiscal activities in the first half of the year, with significant policy activities resuming in the second half.
“Therefore, the true measure of economic growth will be dependent on the intensity of economic activities in the second half of the year. This would be predicated on a peaceful post-election environment, improved performance in the non-oil sectors and positive oil sector contribution. We believe the business environment in 2019 will remaining challenging – following on from 2018. As highlighted earlier, we expect a slowdown in economic activities in H1 2019 due to election related uncertainties to also weigh on the industry with banks exercising significant restraint and due diligence on all cash transactions. We expect the regulatory environment to be firm, but supportive and more conciliatory in 2019 – in view of the need to manage investor perceptions to supposedly harsh regulatory decisions and foster confidence in the economy”.
It said “Given the recent fall in crude oil prices, and the noted challenges around the effectiveness of the government revenue machinery, we are concerned about the downside risks to a higher deficit. With the recent commitment to Nigerian Labour Congress (NLC) to implement the new minimum wage structure in 2019, there is a higher chance that government expenditure could rise above the projected level, thus widening the deficit. The real GDP growth estimate of 3.01% appears aggressive considering the marginal growth recorded in 2018. Given that the official unemployment figures released by the NBS for Q3 2018 puts unemployment rate at 23.1% (Q3 2017; 18.8%) which represents about 21 million unemployed Nigerians and that the job creation statistics of the country does not suggest the likelihood of accelerated job creation within the next 12 months, achieving a GDP growth of 3.01% in 2019 may be an uphill task for the government. It is likely that the National Assembly will pass a budget that incorporates the new minimum wage structure and adjust for lower oil price & production level estimates. It will however be interesting to see how these will be balanced with recent calls to reign in fiscal borrowing.
“Recent releases from the Debt Management Office (DMO) puts total public debt stock as at Sep, 30 2018 at N22.43 tn (US$73.2bn), consisting of N15.8tn Domestic Debt (Federal and State governments) and N6.6tn External Debt (Federal and state governments). The data brings to the fore ongoing discussions about the sustainability of the government’s debt profile in the face of declining revenues. The potential capacity to repay as highlighted by the debt- to-GDP ratio of 19% has been questioned in many quarters as less important than debt-to-revenue of 65% which measures ability to the repay. Thus, while government debt is currently about 19% of national GDP, the cost of servicing the debt is projected to be 24% of the 2019 budget and 30.7% of the planned revenue. With the IMF and the lower legislative house expressing concerns about the level of debt and the challenge of significantly increasing its revenue streams, it becomes imperative for some moderation to be introduced to the rate of debt accumulation. It is our opinion that irrespective of which measure you hold, the ability to accelerate revenue generation is an important barometer for debt servicing. We are concerned that any planned deficit financing in 2019 will only balloon the debt profile, contributing to a further crowding out of the private sector, with attendant impact on economic growth.
“A close scan of the industry reveals that there’s a positive relationship between performing loan book and elevated global oil prices, and the reason is not far-fetched as over 30% of the total industry exposure are to the oil and gas sector. With oil prices relatively elevated, the industry had to contend with the combined effect of IFRS 9 resulting in increased loan loss charges against shareholders’ fund which decreased capital, declining loan book due to the relatively low demand for credit and reduced capacity of banks to lend. We expect banks to intensify efforts to grow their loan books albeit to quality risk rating names, and also expect NPLs to decline from presents level” the report said.
