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Nigeria Banks N389bn Fee Income No Relief From Falling Yields

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Nigeria’s biggest lenders have generated N389.87 billion in fee income so far this year, but the amount is not enough to add impetus to revenue in an ultra-low yield environment and coronavirus pandemic induced headwinds.

Eight out of the eleven lenders – which represents 72.72 percent of the total figure-tracked by MoneyCentral saw a sharp reduction in fees and commission income, as the cumulative figure dipped by 4.80 percent compared to N409.57 billion recorded in the 2019 period.

Analysts have attributed such slump in related fees to stringent measures put in place by the regulator to spur lending to the real sector of the economy and the coronavirus pandemic that paralyzed trading activities and tipped the country into its second recession in five years.

“At the start of the year we saw the central bank review downward electronic banking transactions and an economic downturn has dampened the income that banks earn from trading activities in general commerce,” said Gbolahan Ologunro, equity research analysts at Cordros Capital Research.

In January 2020, the apex bank had instructed banks to slash withdrawal fees usually charged after the third withdrawal from Automated Teller Machines (ATM) within the same month.

Fees and charges from Automated Teller Machine were reduced to N35 from N65 while maintenance fees were reviewed to N50 every three months (quarterly), from the initial monthly period.

A punitive or harsh regulatory environment and low fixed income yields mean banks may not see double digit growth in interest income and profit, and they could be exposed to rising non-performing loans or deteriorating asset quality if they are continually forced by the regulator to extend credit to risky sectors.

Banks, who rely on juicy yields that add strength to earnings, were stunned when net yields on treasury bills began to tumble like a pack of cards due to  the central bank’s abrupt decision to exclude individuals and corporations from its Open Market Operations (OMO).

The regulator nailed the coffin when it cut the money policy rate (MPR) or benchmark interest rate by 100 basis points as it sought to stimulate the economy causing an unprecedented rotation from bonds into equities as Nigerian stocks head for the highest gains in seven years.

Zenith Bank’s fees and commission income dipped by 19.94 percent to N59.12 billion as at September 2020, the first drop in four years, according to data gathered by MoneyCentral.

Guaranty Trust Bank (GTBank), the largest lender by market capitalization, saw fees and commission income reduce by 29.62 percent to N32.72 billion in the period under review as against N46.49 billion the previous year.

United Bank for Africa, the pan Africa lender, recorded an 11.41 reduction in fees and commission income to N56.24 billion in the period under review from N63.29 billion the previous year.

The small and mid-sized lenders, who engage more in retail activities, bore the brunt of the macroeconomic uncertainties as Fidelity Bank, Sterling Bank, and Union Bank recorded 34.68 percent, 26.21 percent, and 34.68 percent reduction in fees income respectively.

Fitch, a global ratings agency, had warned that the country’s punitive rules would weigh on income, as it expects profitability to decline due to rising Covid-19 induced impairment charge.

The cumulative interest income and similar charges of the largest lenders declined by 1.81 percent to N2.11 trillion as at September 2020, the first drop in five years, according to data gathered by MoneyCentral.

Nigerian banks compared to other markets operate in a volatile environment as they have to deal with economic shocks, short cycles and persistent problems in the oil sector.

“Profitability is going to decline, but the degree depends on the extent of loan-impairment charges recognized in the year and the size of trading and translation gains,” said Mahin Dissanayake, senior director for Europe, Middle East and Africa bank ratings at Fitch.

Nigeria’s gross domestic product shrank 3.6 percent in the three months through September from a year earlier, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortage weighed on output.

The International Monetary Fund (IMF) has forecast that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. But the global lender expects Nigeria’s economy to rebound by 2.6 percent in 2021.

Analysts at Cordros Securities said regardless of the pandemic that 2020 was always going to be a challenging one for Nigerian Banks

The Loans-to-Funding ratio (LFR) directive of 2019, combined with the cash reserve ratio (CRR), already left banks with little room to maneuver, according to analysts at Cordros Securities.

“However, further indiscriminate CRR debits which had already become a hallmark of 2019 despite institution only at the tail end of the year, pressured liquidity for banks in 2020,” said the analysts.

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