Zombie Banks

Times should have been tough for banks and so why are they able to announce higher year on year profits?

It seems a couple of reasons.

Firstly, non-performing loans are not being declared.

The banks huge loan books mainly comprised of lending to oil industry companies, is massively impaired.

These companies have for two years been struggling to make their repayments based upon the drop in oil price and collapse in volume and exploration.

Instead of declaring the issues and taking loan impairment charges, the banks are kicking the can down the road with continuous restructuring of the debt.

This means that technically they do not have to declare the loan as nonperforming.

This also means that not only are their books unaffected by taking an impairment charge, but their risk weighted asset position remains manageable and the regulators so not require their capital ratio to be improved.

Add to this that AMCON alleged insolvency makes them unable to take on more non performing debt at inflated values.

Furthermore without proper oversight, the situation makes it is an easy decision by banks to hide the problem and defer the issues by simply waiting for sunnier days.

Secondly, the opportunity to make money from the dollar scarcity and arbitrage between the official and unofficial exchange rates has been enormous and allowed the banks to profiteer.

If you add the banks long standing techniques of applying questionable revenue recognition rules then, just like magic, you have a paper profit.

Personally, I don’t believe it.

Once there is some relief from the recession, expect massive consolidation amongst the zombie banks as the wealthy eat the insolvent in order to survive and take on their assets to bolster poor balance sheets.

Foreign lenders will not touch the Nigerian Banking sector with a long pole at the minute, so this problem is hurting us all by affecting the health of the economy (cost of credit is high, exchange rate etc).

Technical insolvency stalks the sector. Beware.

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