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In Four Years, Banks made N1.82 trn Interest Income from Government Debt

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Nigerian banks, facing challenges on many fronts, have capitulated to the punitive rate environment as interest income that they earn from holding government debts have fallen to a four-year low and analysts see a deeper slump next year.

The largest lenders realized N456.33 billion in short term government securities as at June 2020, which is a 12.22 percent reduction from 2019’s N519.75 billion, and the first drop in four years, according to data compiled by MoneyCentral.

In the past four years, they made a collective N1.82 trillion by buying up local government bonds.

Banks were making money by parking their cash in sovereign securities when yields were around 17.50 percent and 22.50 percent in 2017.

However, yields on 1-year Nigerian Treasury Bills have crashed to a 10-year low to the region of 2.75 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.

Wale Olusi, Head of Equity Research at United Capital said next year will be tougher for lenders and he expects yields to be much lower as Open Market Operation (OMO) rates are crashing with alacrity.

“As at the first quarter of last year, banks could still buy OMO at 13 and 12 percent, but they are forced to purchase at 3 percent and 4 percent. By the time you factor that into their full year results you will see that they won’t make money as they used to,” said Olusi.

A breakdown of the figures shows Zenith Bank’s interest income from treasury bills dipped by 21.03 percent to N67.90 billion as at June 2020. Access Bank’s income from state securities reduced 31.14 percent to N74.30 billion in the period under review.

First Bank Holdings Plc’s interest income from short term government securities fell by 16.36 percent to N72.64 billion in the period under review while United Bank for Africa (UBA)’s interest income from government debt dipped by 6.31 percent to N82.19 billion as at June.

Banks in Africa’s largest economy are reeling from punitive central bank rules that are eating into revenue while the coronavirus pandemic has added another layer of uncertainty.

Lenders had been forced to lower interest rates earlier in a bid to meet the Loan to Deposit (LDR) requirement. Analysts have warned that the hike in minimum LDR could lead to deteriorating asset quality and further erode profitability.

To curtail excess liquidity in the banking sector, the central bank raised the cash-reserve requirement for lenders to 27.5 percent of total deposits, from 22.5 percent.

The coronavirus pandemic that ravaged economies across the globe dealt a great blow on banks’ earnings as provisions for bad loans spiked. Default rates increased because customers were unable to pay interest on money borrowed during the lockdown period.

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