CBN IN DISTRESS OVER FALLING OIL PRICE

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.