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The Twin Shock: COVID-19 & the oil price war and implications for the banking sector

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KPMG, Twin shock, banking sector, Covid-19, oil price

INTRODUCTION: COVID-19 is in the first place, a pandemic with potential serious implications for people’s health.

It is an unprecedented challenge for our modern societies and health systems.

The consequences of the pandemic for our global economy and financial sector are unpredictable.

Economists are convinced that we are heading for a significant economic downturn; however, responses from Governments and Supervisors have been prompt and different measures have already been taken to sustain the economy, the banking sector and, ultimately, the people.

At KPMG, we have analysed the current situation and pointed out some specific topics that the banking sector should be considering and addressing while taking the necessary measures to cope with this “new normal”.

This document is intended to provide additional insights into the key areas of impact for the banking sector and offer suggestions on measures that can be taken to manage it.

The Twin Shocks 

Nigeria is currently faced with Twin Shocks… with multifaceted impact 

  • There is a difference between oil supply shocks and oil demand shocks
  • The Covid-19 related oil demand shocks will be addressed once the pandemic bottoms out
  • However, the effect of the oil price war will depend on the scenarios that play out between Saudi Arabia & Russia.

Recommendations for Strategy, Business & Operating Model 

  • Plan for the M&A rebound post COVID-19 e.g. increase list of potential investors/targets, enhance equity story for the transaction, undertake housekeeping to eliminate value leakages e.g. vendor assist/due diligence etc.
  • Identify and redesign key journeys that are likely to be affected and result in poor experiences e.g. card expiry. Furthermore, improve user experience on digital channels while proactively managing customer perception and be seen as community oriented.
  • Partner with the CBN to disburse emergency response credit facilities. For existing loans, extend loan payment period for short term credit facilities by 3-6 months while restructuring terms for longer-term instruments. Furthermore, the Bankers Committee should consider engaging CBN on relaxing the LDR compliance requirements.
  • Improve on bouquet of digital offerings and deploy dedicated help lines to key clients and offer advisory services to clients in key sectors that are affected. Also, engage customers through various communication channels to reinforce messaging that their banking service provider has the capacity to weather the shock.
  • Conduct market segmentation analysis to identify locations where demand for in-branch services is high and can be provided without undue risk to staff and the public. Additionally, conduct a comprehensive review of credit customers, assess level of vulnerability of each category to the impact of the outbreak and develop a scenario-based risk mitigation strategy.
  • Support employees to deliver consistent customer experience by equipping them with adequate remote working facilities. The priority should be on customer facing teams or teams that require infrastructure only available on-premise. In addition, banks should make contingency plans for contract and utility staff. Finally, adequate plans should be made for the Board’s operational effectiveness.
  • Explore cloud strategies best suited to the bank’s risk appetite. Also, there is need to perform a business impact analysis to identify assets that can be moved to the cloud and invest in process automation through the strategic use of bots and APIs.

Recommendations for Risks 

  • Review and re-assess the adequacy of their credit portfolio plan; review credit processes to identify the vulnerabilities exposed by the pandemic and develop ways to mitigate them. Furthermore, engage customers and begin conversations around facility restructuring and forbearance.
  • Update operational risk scenario analysis, planning, policies and procedures in line with recent developments.
  • Assess and quantify the impact of the emerging changes in market variables on the bank’s current position. Additionally, review the effectiveness of market risk stress testing and mitigation mechanisms.
  • Review plans and projections for the year while re-aligning current business targets/budgets with current global realities.
  • Re-assess funding/capital plan in the light of the current economic situation while conducting a review of the effectiveness of liquidity stress testing and contingency funding plans/policies.
  • Prepare profit forecasts based on reasonable scenarios and assumptions in order to estimate the comprehensive financial impact of the pandemic. Also, there is need to develop and implement strategies to preserve the income margin; re-evaluate the viability of capital projects, explore cost optimisation options etc.
  • Assess the adequacy of internal controls under the new working arrangements while intensifying security awareness amongst staff and customers via email, text messages and other mediums, providing tips on safe use of your digital channels.

Recommendations for Audit, Financial Reporting and Tax

  • Retain supporting evidence as FIRS may require banks to show a basis for write-offs or impairment of non-performing loans before they can be allowed as tax deductible expenses for income tax purpose. Also, clearly outline taxable benefits and inform employees on all forms of deduction prior to implementation.
  • Proactively assess the tax impact of COVID-19 on their operations and business continuity while maintaining a stronger oversight on their tax affairs.
  • Consider what information about the outbreak was known, or knowable, to market participants at the reporting date in order to measure the fair value at the measurement date. A critical revision of discount rates may be necessary for the lease liability computations.
  • Where annual reports are yet to be issued, conduct a critical assessment of whether the COVID-19 impacts should be considered in adjusting events. At the minimum, a comprehensive disclosure may be required in the financial statements.
  • Maintain positions between foreign currencies assets and liabilities adequately. The CBN may also provide support in situations where the open positions are (net liability).
  • Receivables for recoveries should be recognised when it is virtually certain that the banks would be compensated for some of the consequences of the COVID-19 outbreak under an insurance contract.
  • A review of managements’ going concern assumptions is critical. Material uncertainties may need to be disclosed in the event that the financial statements are prepared on a going concern basis.

BY KPMG

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