IFRS 9 Requirement – Banks lose N1.1 Trillion to Bad Loans

Banks in Nigeria lost a total of N1.1 trillion in their books as a result of compliance with the requirements of International Financial Reporting Standard (IFRS) 9 on recognition of bad loans.

In compliance with IFRS 9, banks estimate and book an upfront, forward-looking expected loss over the life of any loan granted and monitor for possible default. This resulted to increase in provision for bad loans (impairment for credit losses) by banks.

The figures are from a report presented by Ada Ufomad, an analyst at Agusto & Co, on the Nigeria Banking Industry.

She said: “In 2018 the assets of the banking industry were about N33.3 trillion and we think in 2019 growth will be driven largely by the fact that a lot of banks are raising capital.

In 2018 there was the IFRS 9 accounting principle that was introduced to the banking industry and it had a significant impact on capital. The industry lost about N1.1 trillion from banks’ capital. So what we are seeing now is that banks are trying to recoup these losses, banks are raising Tier 2 capital. Some banks have come to the market to raise capital in the form of Tier 2 bonds. So we think that will be a major driver of assets in 2019.”

Speaking on the company’s outlook for loan growth in 2019 against the backdrop of the minimum Loan to Deposit Ratio (LDR) of 60 percent recently ordered by the Central Bank of Nigeria (CBN), Ufomadu said, “We don’t think that banks will lend more to meet the 60% LDR because of the credit risk involved. As a bank, I don’t think they will just start giving out loans because they are trying to meet with a regulatory requirement.

“At Agusto & Co, we believe that there might likely be an extension of the deadline for meeting the LDR. We see banks responding by reducing their deposit base because that is an easy way to meet up with the LDR, and what this means is that since it is likely that banks will be rejecting some deposits, the interest rate on deposit will likely reduce, so interest expense for banks may reduce.

“Some people also believe that this might lead to a pricing war, with competition for premium borrowers. That is according to a school of thought, but generally, we don’t believe there will be a significant increase in the loan book of the banking industry.”

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