Why Banks should be worried with the fall in oil prices

The International oil benchmark, Brent crude, has fallen to its lowest level this year and below the proposed benchmark for Nigeria’s 2019 budget. The Brent Crude Price, the benchmark oil price used to gauge Nigerian oil sales fell to as low as $60, the lowest seen since November 2017.

It has dropped by more than 20% from a year high of about $86 per barrel back in October this year as the U.S shale producers have double down on production and are pumping more oil creating more supply glut in the market.

In Nigeria, the profitability of most banks is tied to oil prices as a significant percentage of loans by banks are given to players in the upstream and downstream sector of the oil and gas industry.

How this affects commercial banks

Commercial banks in the country have every reason to fret as the global oil prices continue to plunge. If this downward trend is maintained, it could damp the Non Performing Loans of some banks that have huge exposure to the oil and gas industry.

In its Q3 2018 financial report for the period ended 30th September, Tier-one bank Zenith Bank’s NPL has $475.42 billion representing 50.70 percent of its entire $937.10 billion foreign currency loans exposed to the oil and gas sector.

Fidelity Bank’s NPL at the end of September 2018 was put at N53.45 billion, while 33.0% of the NPLs are to the downstream oil and gas sector. The biggest percentage on its loan book.

Another tier-one bank, United Bank for Africa’s NPLs reduced to 6.9 percent (N110.40 billion) in September 2018 from 7.2% in 2017 full year while 35 percent of the bank’s total NPLs per sector are to the oil and gas sector in Q3 2018.

According to the International Energy Agency, it expects non-OPEC output alone to rise by 2.3 million barrels per day (bpd) this year while demand next year was expected to grow 1.3 million bpd.

OPEC and its partners are set to meet on Dec. 6 in Vienna, but the direction of next year’s oil prices may well be decided later this week when the key decision makers are set to gather on the sidelines of the G20 summit in Buenos Aires.

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Author: see naija

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