Downstream sector at risk from currency devaluation – Lenders

naira_nigeria_oilOil’s decline and the subsequent naira devaluation which is proving to be the worst since the home grown financial crisis of 2009 is a threat to the downstream petroleum sector, say Nigerian lenders.

Lenders are evaluating their exposures to various sectors as oil slumps and the naira tumbles.

Nigeria’s naira dropped 2 percent to a new record low against the dollar in early trading on Monday, after closing at N178.75 on Friday.

The lenders positions are contained in a December 1 research note by Renaissance Capital obtained by BusinessDay yesterday.

“Stanbic believes that the downstream sector is where there could be significant pressure from devaluation. Exposures to currency risk here are typically short-tenured and of a trade nature, with revenues coming in before exposures are due to be paid,” said Renaissance Capital SSA bank analyst, Adesoji Solanke, in a note released December 01.

Oil and gas (including solid minerals) now takes the lion’s share of Nigerian banks’ credit, with its proportion doubling to 22 percent in FY13, vs. 11 percent in 1Q08.

During the 2009 crisis, the crash in oil prices and subsequent devaluation of the currency led to a significant deterioration in the asset quality of the downstream oil and gas sector.

Rencap says this time Nigerian banks have learnt a number of lessons from the last crisis and have improved their risk management structures in downstream oil and gas lending.

Oil and gas lending made up 7.8 percent of all bank loans and 10.6 percent of Non Performing Loans (NPLs) in Rencaps universe of 10 banks under coverage as at 9 months 2014.

From Rencaps discussions with GTB, the bank believes, “There are risks in the downstream book because the margins to these businesses are quite thin and could get eroded by currency devaluation.”

The value of presently outstanding subsidy payments was put at N300bn, with the FGN committing to clear about half of this amount before the end of the year.

The implication of these delays is that the banks intermittently halt lending to the petrol importers when their subsidy debts reach internal limits, which has often led to queues in the country.

One reason for the riskiness of the downstream sector was that for the bills of laden executed before the devaluation, the subsidy repayment will be based on the pre-devaluation exchange rate and only bills executed after the devaluation will be refunded using the devalued exchange rate.

This implies that the company bears the loss of the devaluation, according to Rencap.

The CBN has been struggling to balance defending the USD/NGN exchange rate with limiting the depletion of FX reserves.

Foreign reserves in Africa’s leading energy producer dropped 17.3 percent year-on-year to $36.9 billion by Nov. 26, according to central bank data.

Brent crude was down 0.47 percent to $69.82 per dollar by 8:26 A.M. Eastern time on Monday.

The downstream sector is likely to be the most stressed sector in the event of a devaluation, given the currency mismatch, according to Diamond Bank management.

“Alongside other sectors that are affected by currency movements, the bank has a structure in place to convert the FX loans to naira, once the exchange rate reaches a certain limit, ,” the banks management said, according to Rencap.

For Skye Bank the “Downstream is a key risk area in the event of a currency devaluation. The bank ensures that it funds businesses with off-take agreements, or that retailers have a tank farm.”

The recent weakness in oil prices to below $70/bl is raising concerns on its implications for the Nigerian banks.

For Fitch ratings, the naira move impact is limited for banks, but FX risks are high.

“The devaluation will be a drag on capital ratios as risk-weighted assets of foreign-currency loans rise. But we expect this negative drag to be modest and largely offset by revaluation gains from long FX positions and retained earnings,” Fitch said in a note released on Friday.


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