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Wednesday, March 29, 2023

Big Banks Feel Sting of Low Yields as Revenue Growth Slows

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Nigerian banks are feeling the sting of falling rates as their revenue have been growing at a slow pace over the past four years.

Net interest income (NII), the difference between what the bank charges borrowers and what they pay creditors, increased by 4.66 percent on a cumulative basis to N836.32 billion in June 2020, from N799.08 billion the previous year, data gathered by MoneyCentral shows.

That compares with a sharp increase of 24.16 percent in combined NII in 2017, a period when lenders took advantage of high yield on government debt securities to shore up earnings.

That same year (2017), Open Market Operations (OMO) rates were high as the central bank tightened system liquidity in order to tame spiraling inflation. Headline inflation rate was 18 percent then.

A trend analysis of the NII showed that it declined by 2.088 percent and 2.32 percent in 2018 and 2019 financial years.

As inflation was gradually coming down, the regulator was adjusting the OMO rates downward. Therefore, yields on short term government debt started to drop to the detriment of companies that rely on juicy yields.

In September 2019, Nigerian Treasury Bill Rates crashed to a 3-year low following the apex bank’s restriction of individuals and Nigeria’s corporates from participating in both primary and secondary markets of its Open Market Operation (OMO) window.

In the last five years, the largest lenders have collectively realized N3.85 trillion in net interest income.

There are concerns that the coronavirus pandemic induced headwinds that stoked huge bad loans and a punitive regulatory could cast a pall on future earnings.

The central bank increased lending pressure on banks as it hiked the minimum loans to deposit ratio (LDR) to 65 percent from 60 percent, citing the need to spur credit to the economy.

At the recently concluded MPC meeting, the Central Bank Governor, Godwin Emefiele disclosed that the LDR policy is yielding fruit as the total credit to the economy rose to N19.33 trillion in August 2020 from N15.57 trillion in May 2019.

However, analysts have warned that the new rules could stoke non-performing loans (NPLs) and undermine profitability in a period that marked by macroeconomic uncertainties.

The non-performing loan ratio of the Nigerian banking sector dropped to 6.6 per cent at the end of April 2020 from 11 per cent in April 2019, according to latest data from the Apex bank.

Analysts at CSL Stock Broker Limited are of the view that banks will remain cautious in creating loans given elevated risks to asset quality due to the fragile macro conditions.

“In the medium to long term, credit creation will be dependent on the pace and pattern of recovery in the economy,” said the analysts.

The country’s gross domestic product (GDP) slowed to 1.87 percent in the second quarter of 2020 as the lockdown policy imposed by government to contain the coronavirus paralyzed business activities.

Further analysis of the financial statement of banks showed that Access Bank’s net interest income fell by 15.59 percent to N91.47 billion as at June 2020; that compares with an increase of 21.31 percent in 2017.

Guaranty Trust Bank, the largest lender by market capitalization saw net interest income increase by 9.28 percent to N124.39 billion as at June 2020; that compares with 63.73 percent increase in net interest income in the corresponding period of 2017.

United Bank for Africa (UBA)’s net interest income rose by 11.66 percent to N118.47 billion as at June 2020; that compares with a 58.07 percent uptick recorded in 2017.

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