Nigerian banks endured a record decline in revenue from interest income in 2020, as the economic fallout from coronavirus pandemic and tighter rules by the central bank bit into profit margins.
The combined interest income and similar charges for the largest banks dipped by 3.24 percent to N2.73 trillion in December 2020, the steepest slump in five years since MoneyCentral started gathering data.
A rigorous trend analysis of industry revenue by MoneyCentral shows interest income rose by 7.94 percent to N2.54 trillion in 2019; was up slightly by 1 percent to N2.62 trillion in 2018; and surged by 50.24 percent to N2.61 trillion in 2017.
Interestingly, net interest margin (NIM), which compares the net interest income a financial firm generates from credit products like loans and mortgages, with the outgoing interest it pays holders of savings accounts and certificates of deposit (CDs), slumped for all the lenders.
Analysts attribute the deteriorating margins to the punitive rules of the central bank that has been trying to use monetary policy tools tame inflation and stabilize an economy hard hit by the Covid-19 crisis.
“There was an increase in loans to deposit ratio policy, and 2020 saw interest rate on financial securities as low as 5 percent; that was the first time we were seeing low interest for very long time,” said Yinka Ademuwagun, investment analysts at Value Alliance Asset Management Limited.
Ademuwagun however sees a gradual recovery in the net interest performance of banks in 2021 as yields are going up, which he says is positive for net interest margin.
The Apex bank completely prohibited individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions, which sent the net treasury yield crashing to an all-time low.
Also, to accelerate credit to the real sector of the economy, the Abuja based bank hiked the minimum loans to deposit ratio to 65 percent, which forced lenders to lend out at lower rates to meet the requirements.
To further exacerbate the anemic situation of operators of the industry the CBN said lenders must hold 27.50 percent of deposits as reserves-more than 10 times that of South African banks.
Analysts have warned that by swopping on the reserves by authorities sucked excess liquidity out of the system that could have been used to buy foreign exchange and ease the pains of manufacturers starved of foreign currency to import raw materials to meet production.
They added that hiking the LDR could balloon non-performing loans (NPL), a dark reminder of the 2016 crisis that saw a pile up of bad loans that hit the industry.
In December 2020, credit ratings agency Fitch Ratings said it expected asset quality to weaken over the next 18 months on the back of economic shock from oil volatility brought on by the virus.
However, the rally in crude oil prices on the back of successful vaccination, gradual reopening of business after a long period of lockdown and the accord between the Saudi Arabia and Russia on output cut could be a boon for Nigerian banks because beleaguered companies’ cash flow could get a boost that will enable them to pay interest on money borrowed.
Zenith Bank’s net interest margin reduced to 7.90 percent in December 2020 from 8.20 percent the previous year.
Access Bank’s interest income dipped by 8.87 percent to N489.21 billion in December 2020 from N536.84 billion as at December 2019.
FBN Holdings Plc’s net interest margin moved to 4.40 percent in the period under review from 4.10 percent the previous year.
United Bank for Africa’s net interest margin dipped to 4.20 percent in December 2020 from 4.60 percent the previous year.
Stanbic IBTC Holdings Plc’s interest income reduced by 12.15 percent to N105.77 billion in the period under review as against N120.77 billion the previous year.
Despite the low yield environment and slow economic activities, big banks are able to record profit growth, thanks to income from foreign exchange revaluation gains and fees and commission income.