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Record Drop in Interest Expense Adds Impetus to Banks Income

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Nigerian banks have recorded an improvement in net interest income, thanks to a low yield environment as the central bank has imposed stringent policies with the aim of forcing lenders to extend credit to the real economy.

The combined net interest income (total revenue from interest-bearing assets, less interest paid on deposits) of the largest Nigerian banks that have released third quarter results increased by 5.40  per cent, to N1.31 trillion , the largest expansion in four years, according to data gathered by Money Central.

Analysts say the uptick in net interest income is reflective of a low yield environment as reductions in investment outlets have forced banks to revise downward interest on deposit liabilities.

They added that the reduction in interest on savings deposits from 30 percent of Monetary Policy Rate (MPR) to 10 percent is an added impetus to net interest income.

“That have enabled them to record significant gains on lowering interest on deposit,” said Gbolahan Ologunro, equity research analyst at CSL Stock Broker Limited.

The combined interest expense of banks declined by 11.71 percent to N799.70 billion as at September 2020, the first drop in five years, according to data gathered by MoneyCentral.

Nigerian banks are operating in a punitive regulatory environment and the coronavirus pandemic has made things harder for them as there has been an upsurge in impairment costs since valued customers were unable to pay interest on loans during the lockdown period.

The central bank has stuck with a cash reserve ratio that compels lenders to park 27.50 percent of their deposit with it at zero interest rate as it seeks to curb the supply of money and tame inflation, but analysts say the policy will not give banks the room to lend like their peers like South Africa and Kenya.

The Abuja based bank also dips into the accounts when lenders fail to extend 65 percent of their deposits as loans, a measure that was introduced to stimulate credit.

Analysts say that lenders will prefer to stay on low profitability through next year than extend loans to sectors that are much more challenged.

“It is fundamental reforms that create natural demand for loans,” said Wale Okunrinboye, equity research analyst with Sigma Pensions Limited.

“I don’t think the central bank governor is waiting for the crude oil price to hit $80 a barrel before it raises interest rate,” adds Okunrinboye.

There is no growing optimism about speedy Nigerian economic recovery as the country lacks the fiscal and monetary ammunition to ride out of the pandemic induced headwinds. This means that bad loans will go up, which could be worse than the dark days of 2016.

Nigeria’s gross domestic product shrank 3.6 percent in the three months through September from a year earlier, compared with a 6.1 percent, the National Bureau of Statistics (NBS) said, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortage weigh on output.

The International Monetary Fund (IMF) has forecast that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. But the global lender expects Nigeria’s economy to rebound by 2.6 percent in 2021.

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