The newly introduced foreign exchange policy that indirectly devalued the value of the naira, has tremendously changed banks’ lending dynamics, compelling them to reject fresh loans for importation of petrol, otherwise known as Premium Motor Spirit (PMS), New Telegraph has learnt. Already, lenders in Nigeria have discarded the N49 billion loan requests from importers of petrol meant to service the 3.5 million metric tons second quarter allocation schedule.
The banks’ action, investigation by New Telegraph revealed, stemmed from the May 1st total removal of subsidy on fuel by the Federal Government, which threw the 58.37 per cent import permit for marketers in the second quarter fuel allocation into disarray.
The Chief Executive Officer (CEO) of a Tier 1 bank, who confirmed this development, said lenders are not disposed to granting credits to oil importers because the dynamics of risk have changed with the fuel subsidy removal.
Specifically, he said banks, which had developed a product paper around subsidy payments that are usually guaranteed by the Federal Government, are now perfecting a new product paper that seeks to find another way of making sure that their loans for petrol imports are fully recovered.
He said currently, banks are only disposed to giving loans to confirmed uptakers such as Mobil and the likes because they are sure that such loans would be repaid. “Banks’ risks for petroleum imports have changed with the subsidy removal. Most banks now develop on new product paper for onward presentation to their boards for approval.
“During the fuel subsidy regime, banks willingly gave loans to petrol importers because they are sure that part of their loans would be recovered when the Federal Government pays subsidy. But now, the dynamics have changed with the removal of subsidy.
Banks now have to monitor what the petrol importers sell to recover their loans and also factor the cost of devaluation,” the CEO explained. “Don’t also forget that the devaluation of the naira has also raised banks’ dollar-denominated loans by 40 per cent, meaning that lenders need more cash to beef up their capital.”
The marketers in the Petroleum Products Pricing Regulatory Agency’s (PPPRA) second quarter allocation schedule include Techno Oil Limited, Oando Plc., Masters Energy Oil and Gas Limited, Mobil Oil Nigeria Plc., AA Rano, Total Nigeria Plc and NIPCO Plc. Others are Integrated Oil and Gas Limited, Folawiyo Energy, Forte Oil Plc, Conoil Plc, MRS Oil and Gas Limited, and Heyden Petroleum, among others.
Before the removal of fuel subsidy, oil marketers were allowed to import petrol into the country based on the official exchange rate of N197 per dollar but, according to the revised pricing template for petrol released by PPPRA in May, they would be allowed to source foreign exchange (forex) at the current autonomous exchange rate of N298 to the dollar.
Loan facility from banks and third party lenders is a major source of finance for importation of fuel by marketers in Nigeria, Africa’s biggest crude exporter,which depends largely on importation of refined products, as its four refineries are largely ineffective and incapacitated by lack of maintenance and allegation of corruption.
“We received a correspondent from our bank officially denying us the loan made specifically for the second quarter imports programme and I am aware that this is done across board by all other lenders to other marketers who requested for the same facilities,” a management staff of a top product importing and trading company told one of our correspondents.
Stating that the banks’ officials have verbally informed them “this particular loan will not fly,” he added that the exchange of official correspondence between the lenders and the marketers signified an end to such loan request. ”
Aside from Total and Mobil, and a few integrated oil firms such as Oando that could source for funds and foreign exchange through their upstream companies, other importers that need loans from banks for fuel importation have ceased to apply for loan with allocation request,” he said.
Aside from putting stringent measures in place to screen requests for facilities henceforth, the lenders, which are also facing liquidity challenges, have also frozen issuance of fresh credit to finance marginal upstream facilities.
Prior to the removal of subsidy, the PPPRA was empowered to, at every three months’ interval, allocate permits to importers and the Nigerian National Petroleum Corporation (NNPC) on volume of the product to be imported.
Instead of adherence to the allocation, marketers have now been let loose to import with disregard to the allocation due to the new import regime of subsidy removal.New Telegraph had earlier reported that the Federal Government had also set a new target of 2019 for Nigeria to become a net exporter of refined products.
A document from the Ministry of Petroleum Resources, sighted by our correspondent, showed that the minister was optimistic that the target would be met with the new price regime of N145 per litre and the total removal of subsidy on the product. Meanwhile, some banking sector analysts have expressed concerns over banks’ exposure to the upstream oil and gas sector.
It was gathered that of the top five banks’ $4,882 million exposure to the upstream oil and gas sector, at least 15 per cent is exposed to the Trans Forcados Pipeline (TFP). The pipeline has been closed for four months due to recent attacks by the Niger Delta Avengers, a new militant group, which has claimed responsibility for attacks on oil and gas facilities in the oil-rich region. The TFP links a number of oil fields and oil mining leases (OML) in the western Niger Delta with the Forcados terminal on the coast.
Many of these OMLs were once owned by Shell Nigeria, but were sold to indigenous Nigerian upstream companies, in many cases financed by Nigerian banks. At that time, these loans were celebrated as a milestone for Nigeria’s financial institutions and a boost to bank portfolios aimed at supporting greater domestic participation in the industry.
Now that the price of Brent crude has fallen by nearly two-thirds to the mid-$40s, much of that lending has become a liability. “The banks lent way too much,” said a foreign oil executive who observed the wave of acquisitions in 2012-2014. “The assumptions made by the local oil companies were inaccurate.
The value of the assets is basically zero with the low oil price,” he said while speaking on condition of anonymity. “The whole system is shaking.” Five banks – First Bank, which is Nigeria’s largest bank by assets, Diamond, First City Monument Bank (FCMB), Ecobank Nigeria Plc. and Skye Bank Plc. – had issued profit warnings in the past months.
Most of the country’s 22 licensed commercial banks are exposed to the industry through large syndicated loans, many of which were not hedged, and some of which were poorly collateralised, according to analysts. In a sign of the times, one of Nigeria’s leading energy firms, Oando, announced in its results statement recently that circumstances “lend significant doubt as to the ability of the corporation to meet its obligations as they come due.” The company bought an oilfield from ConocoPhilips for $1.65 billion in July 2014.
Upstream oil and gas and services make up an average of around 28 per cent of the banking sector’s loan books. But Robert Omotunde, analyst at Afrinvest, a Lagos-based investment bank, says at least two banks have made more than 30 per cent of their loans to upstream energy companies – notably First Bank, where oil and gas debt makes up 47 per cent of the total loan book.
In addition to the upstream energy groups, local companies that borrowed in dollars to acquire power plants sold in a government privatisation programme are also struggling to keep up with payments. There has been “significant restructuring” of energy-related loans since the price of oil began falling, said Adesoji Solanke, head of research for Nigeria at Renaissance Capital.
But for the restructuring, Solanke estimates that the sector’s non-performing loan ratio would be at least 15 per cent. As it is, the Central Bank of Nigeria (CBN) says the ratio stands at 4.65 per cent. During the 2009 Nigerian banking crisis, more than 30 per cent of loans were classified as non-performing and the banking watchdog was obliged to step in with rescue packages and reforms.
The index of Nigerian bank stocks has fallen by 50 per cent in the past 12 months, far further than the broader market decline of 25 per cent. “The magnitude of losses has been translated directly into how sentiment has been priced into their stocks,” said Omotunde of Afrinvest.