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Thursday, March 30, 2023

Nigeria’s Mega Banks Deliver Profit Growth as Yields Rise

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Nigeria’s mega banks reported profit growth of at least 8.12 percent in the first quarter, fueled by the gradual improvement in yield environment, trading/revaluation gains, and increased creation of risk assets that buoyed loan books.

Data gathered by MoneyCentral shows the mega lenders saw combined net income move to N242 billion in the three months period to March 2022.

Drilling down the numbers,historic analysis shows they collectively grew net income by 5.53 percent to N223.63 billion in March 2021. Profit was up 2.21 percent to N211.90 billion in 2020 and it rose by 17.53 percent to N207.37 billion in 2019, 13.81 percent to N177.03 billion in 2018 Q1 period.

Interestingly, cumulative profit spiked by 39.20 percent to N175.12 billion in 2017, when treasury yields were as high as between 22 percent and 18 percent before its sharp decline.

The rise in interest rate environment supported the profitability of lenders who are able to swiftly reprice credit assets as yields on sovereign instruments ratchet up, according to Gbolahan Ologunro, equity research analyst at Cordros Capital Securities.

“There was also an improvement in income from investment securities. Loans and advances to customers were up,” said Ologunro.

The 12-month treasury yield which hovered between 1 percent and 3 percent between the last quarter of 202o and first quarter of 2021 (pre and post pandemic period) now stands at 4.50 percent.

Also, Nigeria’s 10-year yield was 11.47 percent on Friday April 29, according to over-the-counter interbank yield quotes for this government bond maturity.

And that compares with 8 percent in the first quarter of 2021 and 4.18 percent in the last quarter of 2020, according to data from Statista.

The recent earnings report is a respite for investors who have watched banks profit squeezed by sluggish economic growth, challenging operating environment, coronavirus pandemic, and inflationary pressures.

A high Cash Reserve Ratio (CRR) and capital controls imposed by the regulator that has hindered foreign direct investment continue to place roadblock in the sector’s path.

The effective CRR of the Nigerian banking system, which is among the highest in the world, peaked at 52.4 percent in November 2020, and moderated to 37.3 percent in December 2020, the same month in which Special Bills were introduced, data from Renaissance Capital shows.

“Following this, the system’s effective CRR has been on a declining trajectory, falling to 38.1% in September 2021,” said analysts at Renaissance Capital.

 The combined interest income from loans and advances by the largest banks were up 24.47 percent to N741.10 billion as at March 2022 from N595.93 billion the previous year.

Their net interest income, the difference between the revenue generated from a bank’s interest-bearing assets and the expenses associated with paying its interest-bearing liabilities, was N402.22 billion as at March 2022.

Banks also benefited from the devaluation of the currency that added strength to foreign exchange gains as they continue to leverage on the latest technology to reduce cost and earn sizable income from electronic mobile and electronic banking.

Zenith Bank’s net income increased by 9.68 percent to N58.19 billion in March 2022, and that compares with an uptick at the bottom line by 5.01 percent in 2021, 0.58 percent in 2020, 6.17 percent in 2019, 25.54 percent in 2018, and 41.16 percent in 2017.

Access Bank, the largest lender by total assets, saw profit rise by 9.23 percent to N57.40 billion in 2022 from N52.54 billion as at March 2021.

United Bank for Africa’s net income was up 8.76 percent to N41.49 billion in March 2021 from N38.15 billion the previous year.

Stanbic IBTC Holdings’ profit grew by 33.87 percent to N15.06 billion as at March 2021, the fastest expansion at the bottom line in 5 years.

First City Monument Bank Group’s net income was up 44.61 percent to N5.16 billion in March 2022 from N3.57 billion the previous year.

Sterling Bank’s profit rose by 47.90 percent to N3.54 billion in March 2022 from N2.39 billion the previous year. Wema Bank profit surged by 2.85 percent to N2.85 billion in the period under review, the fastest expansion at the bottom line in over a decade.

Analysts say Nigerian banks still face challenges from foreign exchange crisis, Basel 111/4, political uncertainty bordering on 2023 elections, effective tax rate holiday, and competition from telcos and fintech.

“In conclusion, 2022 poses various fundamental headwinds for the Nigerian banks such as protracted margin pressure, muted trading and revaluation gains, higher effective tax rate and heightened political risks as the elections draw closer,” analysts at Renaissance Capital

“Considering all these factors, we believe that 2022 will be a challenging year, and that the banks may struggle to deliver earnings growth,” summed the analysts.

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