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Tuesday, March 28, 2023

Banks Hooked on Non-Core Lending Income Despite CBN Push

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Nigerian banks are still largely reliant on income from investment securities, and other non-core banking functions to boost revenues and juice earnings, never mind the push by the Central Bank of Nigeria (CBN) to get them to play bigger roles in the real economy via extending loans.

Zenith Bank a tier one lender booked 50.8 percent of its Full Year 2020 revenues equivalent to N342.3 billion, from fixed income trading, foreign exchange (FX) revaluation gains and income from investments in securities such as Treasury Bills and Government bonds, according to data compiled by MoneyCentral.

FBN Holdings another Tier one bank, had non-core banking income of N188.26 billion in FY 2020, equivalent to 32.7 percent of revenues, according to MoneyCentral’s calculations.

MoneyCentral defines core banking revenues as interest income from loans to customers and fee income, everything else is non-core.

The CBN Governor Godwin Emefiele in 2019, came out with a rash of banking regulations aimed at getting lenders to extend credit to the real sectors of the Nigerian economy rather than to park cash in Government securities.

Emefiele ordered banks in July 2019 to use a minimum of 60 percent of their deposits for loans, the so called loan to deposit ratio (LDR) by Oct. 1, 2019, after which the target was then raised to 65 percent.

Early last year, banks also had to cut charges across a range of services from cash withdrawals to account-maintenance fees.

The CBN Governor increased the cash reserve requirements or CRR (percentage of deposits that lenders need to park with the regulator which doesn’t earn interest) to 27.5 percent.

Emefiele said at the time that the move was consistent with the bank’s drive to increase lending.

Emefiele then barred individuals and local non-banking firms from buying high-yielding short-term central bank open-market operations (OMO) bonds, a move designed to stimulate bank loans for purposes other than market speculation.

Bank funds sit idle at CBN as LDR threshold not met

The CBN said in a September 2019 statement that banks that didn’t comply with the CBN’s directive to loan out at least 65 percent of deposits risk an additional cash-reserve requirement (CRR) equal to 50 percent of the lending shortfall implied by the ratio.

Many banks have been unable to meet the threshold as they find it difficult to see lending opportunities in an economy that was in recession in 2020.

Zenith Banks loan to deposit ratio (LDR) was equivalent to 52 percent at the end of 2020, according to MoneyCentral’s calculations.

FBN Holdings LDR was even much lower than the regulatory minimum, coming in at 44.7 percent. FBNH had total loans and advances to customers of N2.2 trillion, compared to customer deposits of N4.95 trillion, at the end of 2020, according to data compiled by MoneyCentral.

The banks seem to have resigned themselves to fate as the CBN CRR penalties kicked in and their mandatory reserves (earning zero) with the CBN soared.

Zenith Banks mandatory reserve deposits (CRR) with the central bank surged by 95.6 percent to N1.33 trillion in 2020, while FBN Holdings mandatory reserves with the CBN surged by 51.3 percent in the same period.

Loan growth vs. Investment in securities

Banks pulled back on loan growth in 2020 as seen by the low LDR thresholds as the economy nosedived.

A look at bank assets, plotting loan growth versus investment in securities at the end of 2020, shows this trend clearly.

Zenith Bank for instance grew its loan book by 20.5 percent in 2020, while assets invested in securities jumped by 68 percent in the same period to N996.9 billion.

While banks pull back from lending they trying for now to keep loan losses at the minimum, despite an expectation that they will rise this year.

Banks Bad loans






FBN Holdings saw its impairment charges for loan losses stable at N50.8 billion in 2020, compared to 2019 levels. Zenith Bank for its part saw loan impairment losses rise sharply by 64 percent to N39.5 billion, compared to 2019 levels.

Fitch Ratings said in a December 2020 report, that Nigerian bank asset quality is expected to weaken over the next 12 months-18 months.

“The sector has performed better than expected since the start of the crisis, limiting the rise in credit losses (in 2020) due to a combination of debt relief afforded to customers, a stabilisation in oil prices, the hedging of financial exposures and the widespread restructuring of loans to the sector following the 2015 crisis,” Fitch Ratings said.

Bank asset quality has historically fallen with oil prices, according to Fitch, while the oil sector represented 28 percent of loans at end of the first half of 2020.

Upstream and midstream oil companies which make up 7 percent of banks gross loans have been affected by low oil prices and production cuts.

Fitch expects that foreign exchange (FX) revaluation and trading gains, and the containment of credit losses will support profitability in 2020.

No succor from CBN on-lending facilities

The outstanding firepower to be used as on-lending facilities fell for the two major banks that have released full year 2020 results at the time of filing this report.

FBN Holdings outstanding funds for on-lending fell by 19 percent to N67 billion in 2020,

The funds include the CBN and Bank of Industry (BOI) refinancing of bank’s loans to the manufacturing sector at 7 percent per annum, as well as the CBN, Ministry of Agriculture and Water Resources Commercial Agricultural Credit Scheme (CACS) Loans at 9 percent per annum.

Zenith Banks outstanding firepower for onlending also fell some 2.1 percent in the period.

While Nigeria’s economy exited recession in the fourth quarter (Q4) of 2020, with an 0.11 percent expansion, there may be little demand for credit expansion even as unemployment remains high and factories battle to get foreign exchange to import raw materials.

In the meantime banks are still profitable with help from investment in securities that are often tax free, even as the economy wobbles on.

It is a guess as to how long the divergence can continue without the banks beginning to feel the pain on main street.

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