Wema Bank, Others report increase in LLPs
by Niyi Jacobs
The banking sector in Nigeria is facing a challenging landscape in 2024, as higher interest rate levels are expected to impact the quality of bank loan assets and customers’ ability to meet rising finance costs.
According to analysts, bank loan loss defaults have increased in Q1 2024, with loan loss provisions (LLPs) ramping up in response to monetary policy tightening and rising federal fiscal borrowing rates crowding out private-sector credit.
BusinesNG notes that the Central Bank of Nigeria (CBN) recently raised the Monetary Policy Rate (MPR) by 150 basis points or 1.5% at its May 2024 Monetary Policy Committee (MPC) meeting, bringing the total rise in MPR for the year to 750 basis points or 7.5%.
This policy rate rise has led to an increase in interest rates on retail credit by banks and higher loan repayment risks as default rates increase.
As a result, local companies are finding themselves in a difficult position, coping with persistent foreign exchange rate uncertainty and domestic interest rate increases.
The impact of the policy rate rise is already being felt, with second-tier Wema Bank reporting a rise in net interest income in Q1 2024 and an increase in loan loss provisions in anticipation of an increase in bad credits, in line with International Accounting Standards Board (IASB) rules.
The banking sector is bracing for a challenging period ahead, as the perfect storm of rising interest rates, loan loss defaults, and foreign exchange rate uncertainty threatens to erode bank profitability and stability.
As the CBN continues to tighten monetary policy to combat inflation and stabilize the economy, banks will need to be vigilant in managing their loan portfolios and provisioning for potential losses.
The sector’s resilience will be tested in the coming months, and only time will tell if banks can weather the storm and emerge stronger on the other side.
