Kayode Tokede

A report by Renaissance Capital Africa has disclosed that the Central Bank of Nigeria (CBN) forbearance loans for FBN Holdings and six other banks amounted to $4.01 billion, as the CBN announced plans to phase out regulatory forbearance gradually in Nigeria’s banking sector.

Renaissance Capital Africa in a report titled, “Phasing Out Regulatory Forbearances–Exploring Scenarios”, stated that based on its estimates, forbearance loans for FBN Holding alone amount to $535 million.

The report said that the gradual phase-out of regulatory forbearance would allow banks to adapt, mitigating potential disruptions to capital adequacy and liquidity while maintaining sector stability.

During the recent Federal Government of Nigeria investor roadshow for its Eurobond issuance, the CBN announced plans to phase out regulatory forbearance gradually.

Renaissance Capital Africa in the report said the phased approach is more appropriate than an immediate and complete elimination, as it would mitigate the adverse effects of a sudden and total removal of regulatory forbearance, which has now outlived its purpose.

On May 27, 2020, the CBN approved regulatory forbearance measures for Nigerian banks in response to the adverse economic effects of the COVID-19 pandemic.

These measures applied retroactively from March 1, 2020, included a one-year moratorium on all principal repayments for CBN intervention facilities, a reduction in interest rates on CBN facilities from nine per cent to five per cent, and the restructuring of loans for affected households and corporations.

“Consequently, the asset quality of Nigerian banks remained relatively stable despite the economic challenges brought about by the pandemic, with Non-Performing Loans (NPL) ratio of 4.3per cent (Sector average) staying below the CBN’s regulatory benchmark of five per cent,” the report explained. 

The pandemic particularly impacted the Oil & Gas sector, which accounted for most of the restructured loans by Nigerian banks. Notably, a significant portion of these forbearance loans is classified as Stage 2 loans under IFRS 9.

According to the report, the CBN’s gradual phase-out of regulatory forbearance across the banking sector would likely be adopted on a sector-by-sector basis.

“The power sector, having benefited from recent tariff hikes, is expected to be the first to transition out of the forbearance regime. The agriculture sector would likely follow, while the oil and gas sector—where forbearance loans are most concentrated—is anticipated to be the last to exit.

“In this scenario, banks may need to take a 10per cent provision for forbearance loans through equity. These provisions would be passed through equity in the non-distributable, non-capital-qualifying regulatory risk reserve (RRR). This treatment should help preserve profitability metrics, though it will exert modest pressure on CARs.

“Based on our adjusted Capital Adequacy Ratio (CAR) estimates, assuming a 10per cent provision for our selected banks, we project the following declines relative to H1’24 reported CARs: 60bps, 149bps, 198bps, 394bps, 17bps, 124bps, and 128bps for Access Bank, FBN Holding, FCMB, Fidelity Bank, GTCO, UBA, and Zenith, respectively.

“Discussions with the banks suggest that GTCO and Zenith have proactively provisioned for their forbearance loan exposures. Notably, GTCO has provisioned 80per cent of its forbearance loans, with the remaining balance to be gradually written off through equity, while Zenith has provisioned 20per cent.

“Meanwhile, our engagements with FBNH revealed that one of its largest forbearance loan exposures, Aiteo Group, has successfully met its interest payment obligations over the past two quarters, indicating improving cash flow conditions for the borrower. While this regulatory shift introduces incremental capital headwinds for the banks, proactive provisioning by some players and ongoing borrower improvements (e.g. in the power and oil & gas sectors) should mitigate near-term impacts,” the report explained. 

The firm maintained that the best-case scenario would involve regulatory forbearances not being phased out, meaning banks would not be required to classify them as NPL or take any provisions against them.

Renaissance Capital Africa noted that given the CBN’s intention to phase out forbearance loans, they view this scenario as highly unlikely.

In the worst case, they explained that forbearance loans classified, 10 per cent specific charge through P&L

“The worst-case scenario for our selected banks would involve recognising forbearance loans as non-performing (NPL) and a corresponding 10per cent provision being taken through the profit and loss (P & L) statement.

“It is important to note that most of these forbearance loans originated from the oil and gas sector and are collateralised by the oil reserves of the respective firms. However, banks rarely pursue foreclosure, as it risks permanently damaging business relationships and requires approval from various government departments and agencies.

“Without the CBN’s regulatory forbearance measures, NPL ratios for the selected banks would likely have been higher, as these measures were crucial in preventing loans from being classified as non-performing,” the report noted. “Notably, based on our estimates, all the selected banks, except Access Bank and GTCO, would see their NPL ratios exceed the regulatory benchmark of five per cent. The increase in their adjusted NPLs would necessitate provisioning to absorb the losses arising from the reclassification of forbearance loans as NPLs. However, most of the selected banks appear well-positioned to absorb potential losses, as their FY’24 Cost-of-Risk (CoR) estimates remain below their projected FY’24 breakeven CoR,” the report added.