Non Performing Loans surge on new accounting measures

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RESERVE Bank of Zimbabwe governor John Mangudya says the country’s banking sector non-performing loans (NPLs) increased by about $85 million in 2018 after implementing the International Financial Reporting Standard 9 (NewIFRS 9).
IFRS 9 — which replaced the International Accounting Standard 39 — requires the recording of expected losses on financial assets, such as loans, regardless of whether there has been any actual loss. Previously, these ‘impairment losses’ would only be recorded after they had been incurred.
“The ratio of NPLs to total loans of 8,25 percent as at December 31, 2018, from 7,08 percent as at December 31, 2017,” Mangudya said in his Monetary Policy Statement last week.
“The increase in NPLs is largely a reflection of forward looking credit risk management tools adopted by banks in line with the IFRS 9 accounting standards, resulting in improvement of the banks’ risks controls and provisions coverage,” he said.
The central bank chief, however, indicated that he was satisfied with the industry’s adoption of the new accounting standard.
“The implementation of IFRS 9 represents a significant milestone in financial stability enhancement due to the forward-looking nature of provisions set under the new standard,” he said.
The quality of the banking sector loan portfolios had improved over the years with the NPLs ratio to total loans falling from 20,45 percent to in 2013 to 7,08 percent in 2017.
The central bank says this came after financial institutions “strengthened their credit risk management systems, in the aftermath of balance sheet clean up through disposals of NPLs to Zimbabwe Asset Management Corporation (Zamco).
As at December 31, 2017, Zamco had acquired NPLs amounting to $987 million.
Meanwhile, banks have survived an onslaught brought by IFRS 9, which came into effect in January 2018, after the majority of them recorded healthy profits during the year.
There had been fears that the new accounting standard would put a huge dent on banks’ revenue performance.
All banking institutions, with the exception of one, reported profits for the year ended December 31, 2018, with a 61,06 percent increase in aggregate profits from $241,94 million in 2017 to $389,85 million in 2018.
However, financial statements of most banks for the half-year to June showed that the implementation of the new accounting standard had a significant impact on impairment losses, which in some cases resulted in decreases in stated profits and, or capital.
NMB Zimbabwe Holdings (NMBZ), whose profit after tax was up by 150 percent at $9 million in the half year period after a 62 percent increase in its fees and commissions, said impairment losses on loans and advances amounted to $1,4 million from a prior year amount of $878 304.
“In terms of the increase in impairment allowances we also have to bear in mind that we are applying different methodologies here, under IAS 39 it was backward looking but with IFRS 9 we are forward looking,” Benson Ndachena, NMBZ’s chief financial officer, said at the financial institution’s half year results presentation in 2018.
“Under IFRS 9 we are even impairing the loan grades which we would not impair before, at the moment you create a loan, from day one, you now have an impairment charge, and this was not the case previously.
“We now have instruments such as treasury bills which are also being impaired under the new standard,” he said.
Other banks were also affected in a similar way.
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