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Wednesday, June 29, 2022

Coronavirus Fallout Set to Make Tier-One Banks even Bigger

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Tier-One Banks are set to consolidate earnings as a result of the economic fallout from the coronavirus pandemic, making them even bigger, and growing the chasm between the haves and have nots in the Nigerian banking sector, according to MoneyCentral data.

The big lenders comprising FBN Holdings, Guaranty Trust Bank (GTB), UBA, Zenith Bank and Access Bank increased their contributions to total Banking Industry Profits for the First Quarter (Q1), 2020 period, by 50 basis points to 83 percent, while the Tier-2 lenders contributions to profits slipped to 17 percent.

All Tier-1 lenders grew pretax profits in Q1, while for three of the Tier-2 lenders (Sterling Bank, Fidelity and Wema Bank) profits fell from the year ago period.
The big banks also increased profits at a faster rate with cumulative pretax profits rising by 8.3 percent, compared to 4.5 percent for the smaller lenders.

TIER 1 Vs TIER 2
Total Tier one bank pretax profits for Q1, 2020 came in at N224.71 billion, nearly 5 times the Tier-two lenders profits of N46 billion.
Stanbic IBTC bank led the charge for Tier-2 banks, with pretax profits of N24.4 billion in the Q1, 2020 period, followed by Fidelity Bank at N6.58 billion, Union Bank N6.3 billion, FCMB N5.4 billion, Sterling N2.2 billion and Wema Bank N1.129 billion.
For individual Tier-one lenders Zenith Bank and GTB vied for the top spot with pretax profits of N58.79 billion and N58.2 billion respectively. They were followed by Access Bank N46.29 billion, UBA N32.73 billion and FBNH N28.7 billion.
Why it Matters
Smaller Banks will continue to struggle in the current environment as scale and ability to deploy technology becomes invaluable following the changes brought about by the Pandemic.
Inability to effectively compete will weigh on the share prices of the smaller banks and reduce their return on equity to investors.
The regulatory environment of high cash reserve requirements (CRR) and tougher lending requirements via a minimum Loan to deposit ratio (LDR) of 65 percent that attracts penalties for those unable to meet up, means upside may be capped for the smaller Banks.
Renaissance Capital in a February 2020 note by analysts led by Adesoji Solanke said Nigerian lenders need new ideas to grow.
“Nigerian banks are caught in a conundrum and we think the squeeze will continue. A weak macro and tough regulations are core to understanding the dilemma, but the banks cannot afford to stay idle. We believe new strategic thinking is required, of which we see little happening,” Solanke said.
“Nigerian banks cannot afford to stay static, as we do not see the regulatory situation changing soon. We proffer three suggestions as to how they might strategically respond to deliver higher sustainable earnings and create shareholder value: 1) scale growth in extant operations outside Nigeria, 2) evolve into a holding company model with sizeable subsidiaries in fast-growth sectors, and 3) build low-cost business models to penetrate the bottom of the pyramid. The banks would need to tailor these suggestions in a manner that best suits their individual circumstances,” the RenCap analysts concluded.

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