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Monday, September 25, 2023

First Bank is the Least Efficient Lender as Cost to Income Ratio Hits 73.5%

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FBN Holding Plc is reeling from spiraling operating expenses, which means it is less efficient and profitable, and the situation could worsen dramatically over the next five years.

The failure of management and board of directors to cut costs has significantly undermined return on equity and ballooned the cost to income ratio.

For instance, FBNH’s cost to income ratio ex provisions of 73.5 percent as of nine months of 2021 was the highest of the tier 1 banks, according CSL Stockbrokers

And that is in stark contrast with Zenith Bank, (54.90 percent); Access Bank, (62.60 percent); Guaranty Trust Holding Company, (44.90 percent), and United Bank for Africa, (61.90 percent).

The cost to income ratio is one of the efficiency ratios used to gauge an organization’s efficiency. It is used to compare the operating expenses of a bank vis-à-vis its income. The lower the cost to income ratio, the better the company’s performance.

Interestingly, the lender’s operating expenses are growing faster than operating income, and a slow growth in revenue brought on by deteriorating asset yields means the return on average equity reduced to 7.17 percent in September 2021 from 11.98 percent the previous year.

Basically, Nigerian banks operate in a tough and unpredictable macroeconomic environment and the regulatory costs are bloating operating expenses.

The country’s currency value is volatile, with a central bank that props up the naira, and the central bank is seen devaluing the currency to fend off the impact of the United States’ Federal Reserve imminent rate hikes.

Nigeria has currency controls, adding to investors’ concerns about unpredictability and getting their cash out.

Last year, the central bank dissolved the boards of FBN Holdings and parent company FBN Limited over corporate governance breaches as it aimed to tame the slide, and avoid another banking sector crisis.

However, pressure on FBN Holdings loans have eased as there has been a significant reduction on Non-performing loans and loan loss expense.

The improvement stemmed from developments around restructured loans and because of the banks “own debt relief measures.

Also, its stock made some money for investors in 2021, as it surged 59.4 percent in 2021, largely as a result of the stock accumulation by billionaire Michael Otedola, which drove up the share price.

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