Despite what should have ordinarily been a tough year for Nigerian banks, they have delivered much higher returns to their shareholders than peer rivals in Sub-Sahara Africa.
The average return on equity (ROE) of Nigerian banks only moderately pared to 14.1 percent as of nine months 2020, from 15.20 percent as at December 2019, according to data from Cordros Capital Research.
When compared to the performance of peer African banks (South Africa: 13.1 percent and Ghana: 13.5 percent), it denotes the resilience of the sector.
This performance was supported by strong growth in non-interest income and contribution from foreign exchange revaluation gains as inflationary pressures and regulatory costs are making it increasingly difficult for lenders to curtail costs.
However, analysts are of the view that 2021 will likely be a challenging year because the move by the federal government to securitize unclaimed dividend and unclaimed trust funds could impact on deposit and cost of funds.
“They will have to increase their lending and return on equity may moderate,” said Ayodeji Ebo, Senior Economist/Head, Research and Strategy, Greenish Merchant Bank Limited.
Analysts at Chapel Hill Denham Limited-in a recent report-see the average ROAE of banks declining to 15.4 percent as at December 2020 (FY-20E) from 18.90 percent as at December 2019.
Regardless of the pandemic, 2020 was horrendous for the industry. The central bank’s stringent policies-imposed with a view to spurring lending and curbing inflation- was a torn in the flesh of lenders.
First, the Apex bank hiked the minimum loans to deposit ratio to 65 percent, a policy analysts warned could stoked non-performing loans and result in higher cost of risk.
Second, it barred individual local corporations from investing in Open Market Operations (OMO) operation in the third quarter of 2019, and that sent Net Treasury Bills crashing to unprecedented levels. The decision was disadvantageous to banks because plunging yields reduces return that they make from parking their money in government bonds.
Third, the Apex Bank adopted an accommodative policy when it cut the cash reserve ratio (CRR) by 100 basis points as it seeks to curb inflations and shield the economy from the coronavirus headwinds.
Of course, there were punitive punishments for lenders that failed to adhere to the new rules.
Nigerian banks suffered a total of N917.5 billion in new CRR debits from the Central Bank of Nigeria.
“Specifically, the actions exerted downward pressure on industry net interest margin (given CRR is held at zero interest),” said analysts at Cordros Capital.
Despite these myriad of challenges, banks were able to remain profitable and suffered just a single digit drop in earnings.
The combined interest income and similar charges for eleven banks tracked by MoneyCentral reduced by a mere 1.81 percent to N2.11 trillion as at September 2020 from N2.15 billion the previous year.
Their cumulative net income increased by 5.36 percent to N662.51 billion in the period under review, according to data by MoneyCentral.
The growth in profit was supported by a 21.74 percent increase in non-interest revenue to N877.30 billion in the period under review from N720.58 billion the previous year.
The key downside risk to analysts’ expectations are (i) Slower loan growth on weak macro (ii) Limited volume growth on electronic banking transactions for some banks as customers switch to other banks with more efficient channels, and (iii) Sustained weakness in crude oil prices, which could result in higher than expected credit impairments.
The confluence of the factors stated, as well as a lack of meaningful revision to the application of regulator rules, will force banks to find new pathways to profitable growth away from the traditional sources of income; early movers will have the advantage, according to analysts at Cordros Capital Limited.
A lot of banks were hard hit by the coronavirus pandemic that grounded economic activities to a halt as valued customers could not pay interest on money borrowed, which resulted in a spike in impairment charge on financial assets.
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 shortages weighed on output.
Fitch estimates the economy will shrink 3 percent this year and expand 1.3 percent in 2021.