Banks reluctant to grow loan books despite plenty of demand

Banks want an improvement in the power sector so they can improve their loan books.

Banks are unlikely to push lending aggressively for the rest of the year despite numerous demands from varying sectors of the economy.

The situation is expected to continue till year end, unless there are tangible and substantial developments in the power sector and upstream oil and gas, Renaissance Capital, an investment bank has said.

An analyst at Renaissance Capital, Adesoji Solanke, in a research analysis on Nigerian banks said some banks, especially the ones with large balance sheets to fund large-scale power projects, are anticipating some push from the power sector, before notable improvement in loan books can be achieved.

“Some of the banks have indicated that, should the power privatisations go ahead this quarter, we could see a jump in (fourth quarter) 4Q12 loan growth. While this would be a welcome surprise, we are not holding our breath with regard to timing, experience suggests to us that timing is likely to be delayed” he said.

“In our view, we are likely to see tangible progress in the power sector before the PIB is finally passed and hence the extension of loans to the power sector before we see a significant increase in upstream oil & gas investment”.

“In our forecasts, we have assumed little-to-zero impact on loan growth in 4Q12, with the benefits from power privatisation only beginning to come through in Financial Year 2013 (FY13)” he said.

The firm believes some of the banks are likely to see similar levels of loan growth, to those they achieved in Financial Year 2012 if the push from the anticipated developments in the power sector or upstream oil and gas projects remains absent.

“If the power and oil initiatives do not come through we think they are therefore unlikely to pursue aggressive loan growth at the expense of quality” Mr. Solanke said.

The latest development in power privatisation is the announcement of the preferred bidders for the five generating and 11 distribution companies.

The bidders are now expected to submit letters of credit and bank guarantees from “A”-rated banks. The Petroleum Investment Bill, PIB, is being reviewed by a House of Representatives special committee.

Despite this challenge, another cross section of banks, which the firm refers to as ‘the Tier 2-banks’ which do not have sufficiently large balance sheets to fund large-scale power projects anyway, given the single-obligor limit of 20 per cent are supposed to pursue syndicated loans and focus on the volume of loan demands already hanging.

The banks do not have to do all that waiting as loan books could be grown via other sectors of the economy, and the wait for a turnaround in the oil and gas sector is not suppose to deter the banks from wanting to create asset.

“There is plenty of demand for credit on a smaller scale” Mr. Solanke said.

According to him, the issue of concern would now be whether this growth of the loan books is not being achieved at the expense of quality.

The banks have generally been less excited when it comes to their loan books since the industry’s shake up in 2009, when a huge amount of questionable, inappropriate and non performing loans was brought to light.

Banks are also prone to seeking and granting short term, quick yielding loans from the lucrative sectors of the economy such as the oil and gas and telecoms sectors, sometimes at the expense of the manufacturing and agricultural sectors.

There has been a steady decline in aggregate credit to the economy and private sector in particular according to the Lagos Chamber of Commerce and Industry. This, they say, is largely due to the sustained monetary tightening, significant rise in government domestic borrowing and attractive yield of government and treasury bills.

The chamber, in a report projecting the fourth quarter 2012, said it is important for the monetary authority to commence an adjustment of monetary policy, albeit gradually, towards boosting private sector credit, domestic demand, employment and growth.