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Banks Lose Significant Revenue from Loans as Corporate Clients Demand Lower Rates

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Nigerians banks have lost sizable income from loans as their corporate clients demanded lower interest rates even amid a low yield environment caused by the central banks dovish stance.

The majority of them saw total loan books grow faster than interest bearing assets, which combined with receding income on investment securities pretty much explains deteriorating net interest income/margin.

The largest listed lenders on the NGX Exchange collectively grew interest income on loans and advances to customers by 5.95 percent to N939.10 billion as at June 2021, according to data gathered by MoneyCentral.

Drilling down the numbers shows combined interest income was up by mere 3.56 percent to N886.32 billion in 2020.

In 2019 it dipped by 1.90 percent to N855.84 billion, while interest income dipped by 4.87 percent to N842. 15 percent in 2018 financial year.

Interestingly, in 2017, the income increased by 26.69 percent to N194.67 billion, when the yields on both government securities were trading at between 22 percent and 18 percent.

“A lot of banks were forced to reduce their interest rates despite growth in loan books. Even the old valued high earning customers were writing to reduce the rate,” said an industry analyst who doesn’t want his name mentioned.

“BUA raised N115 billion corporate loans at a ridiculously low 7.50 percent in 2020, but with yields rising the cement maker would have raised the debt at 13 percent at the moment,” said the analysts.

Analysts are asking how far can banks re-price their loans especially now that interest on deposits are rising.

Of course, the low interest environment was a boon for companies who swooped on the debt market to raise cash to bolster working capital and fund their future expansion plans.

Nigerian companies have raised over N800 billion bonds from the capital market in the first half of 2021 (H1) just as predicted by Norrenberger in its 2021 Economic Outlook Report.

The Nigeria 10 Years Government Bond has a 12.066% yield as of September 2021, according to data from World Government Bonds.

The Nigeria 10 years government bond reached a maximum yield of 15.856% as of December 2018, and a minimum yield of 4.048 percent as of   November 3, 2020.

Nigerian Banks are facing challenges in different fronts, and the decision of the central bank to bar individuals and domestic firms from its Open Market Operations (OMO) sent treasury yields crashing, resulting in loss of significant revenue from investment securities.

Also, the hike in cash reserve ratio and incessant debit to the accounts of lenders for failing to meet the stringent requirement combined with the minimum loans to deposit ratio rules have sent a predawn chill down the spine on investors who have dumped bank shares.

Zenith Bank’s interest income from loans and advances were up a mere 5.49 percent to N135.42 billion in June 2021, and that compares with a 35.25 percent increase in 2017 financial year.

Access Bank, the largest lender by total assets in Nigeria, saw interest income from loans and advances grow by 8.61 percent to N174.42 billion as at June 2021, but the income spiked by 33.47 percent in 2017.

Guaranty Trust Holding Company, the largest lender by market capitalization, saw interest income reduce by 1.60 percent to N91.37 billion as at June 2021, and that compares with 19.51 percent increases in 2017.

FirstBank Holdings Plc’s interest income dipped by 6.20 percent to N122.03 billion in June 2021, and that compares to 17.40 percent increases in interest income in 2017.

United Bank for Africa, the pan African lender with branch network across the continent, saw 4.40 percent rise in interest income to N118.44 billion in 2021, and that compares with 49.29 percent increase in interest income in 2017.

As the interest rate environment remains volatile, banks will have to rely on their digital platforms to boost electronic banking revenue while embarking on cost measures to shore up profit.

There is enormous opportunity to tap the unbanked population, but they have to invest more in technology as financial technology firms (FINTECH) are cannibalising sales.

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