Higher Brent price, economic pickup drive banks’ NPLs to near 3yr low

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The rebound in Brent price in the last couple of years after the 2016 global oil crash, has not only benefitted Abuja, whose bulk of foreign exchange earnings come from petrodollars, but also the country’s lenders given the improvement in their asset quality.

Figures from the National Statistics Bureau, revealed that non-performing loans (NPLs) of the Nigerian banking sector contracted by 30 percent year-on-year and 6 percent quarter-on-quarter to N1.67 trillion in the first quarter of 2019, the lowest in almost three years.

Source: National Bureau of Statistics

Meanwhile, price of Brent crude opened the year at $54.91 per barrel according to data sourced from Investing.com data bank, and climbed 25 percent to end first quarter at $68.39.

When the global oil prices crashed to a record low of $31 per barrel in January 2016 on the heels of geopolitical tensions along critical trading routes including Russia & Western powers, Iran and Saudi Arabia, the Nigerian economy slipped to its first economic slump in 25 years as the country was heavily dependent on the black commodity.

This saw NPL ratio surge to 10.72 percent in the second quarter of 2016 from 3.72 percent in second quarter of 2014, and banks’ bad loans quadrupled from N380 billion to N1.68 trillion within two years.

“The behavior of NPLs is directed by oil price movement. When oil price rallies, the economy improves, and this would enable oil corporates meet their debt obligations” said Emmanuel Noko, Chief Economist at Enugu-based M&C Consulting Limited.

Speaking further, “If oil price drop significantly say below $45, it is a disaster for the economy. Oil firms will struggle to repay debts, and the adverse effect would be passed on to banks as they are highly exposed to oil sector”

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