The monumental contraction in the return on equity of banks has validated investors’ wariness of an industry reeling from a punitively hostile regulatory environment and volatile currency volatility.
“A pool of investors who want to own Nigerian banks is shrinking. There used to be quite a few supporters. Now, it is very hard to get a client to pick up when you are calling to discuss Nigerian banks,” said Ronak Gadhia, an analyst for investment firm EFG-Hermes.
Of course, the majority analysts and shareholders are of the view that the central bank’s hike in the cash reserve ratio, its dovish stance, and minimum loans to deposit ratio have hindered lenders from generating return on investment they received from their shareholders.
The average industry return on average equity – a key gauge of profitability – for the largest and most liquid lenders fell to 12.18 percent in June 2021 from 13.02 percent as at June 2020, according to calculation by MoneyCentral.
Their combined net income reduced by 1.20 percent to N421.81 billion in June 2021 from N426.95 billion as at June 2020.Combined interest income was flattish at N1.29 trillion in the period under review.
Guaranty Trust Holding Company (GTCO), the largest lender by market capitalisation saw ROE reduce to 19.70 percent in June 2021 from 24.56 percent as at June 2020. Its net income slumped 14.85 percent to N79.41 billion as at June 2021.
First Bank Holdings’ ROE decreased to 9.89 percent to 9.89 percent in June 2021 from 13.46 percent the previous year.
The lenders’ net income fell precipitously by 11.41 percent to N38.04 billion in the period under review from N49.46 billion the previous year.
Zenith Bank Nigeria’s ROE fell to 18.77 percent in June 2021 from 19.71 percent the previous year. Its net income was however up slightly 2.21 percent to N106.11 billion in June 2021.
Stanbic IBTC Holdings recorded the steepest slump in returns to owners of the business as its ROE dipped to 12.43 percent in June 2021 from 25.28 percent in June 2020. Its net income declined by 50.13 percent to N22.54 billion as at June 2020.
Other Nigerian banks recorded a similar trend, but Access Bank and United Bank for Africa (UBA) bucked the trend.
Access Bank’s ROE increased to 22.78 percent in the period under review from 17.17 percent the previous year. Its net income spiked by 42.44 percent to N86.93 billion in June 2021 from N61.03 billion the previous period.
UBA’s ROE moved to 16.41 percent in June 2021 from 13.07 percent the previous year while its net income increased by 36.35 percent to N60.58 billion as at June 2021.
The Monetary Policy Committee (MPC) of the CBN throughout 2019 maintained a CRR of 22.5 per cent but in early January 2020, it was increased to 27.5 per cent.
Interestingly, banks restricted deposit with the Apex bank hit N7.17 trillion as at June 2021, according to data gathered by MoneyCentral.
The CRR is the amount the CBN debits from banks accounts in compliance with its monetary policy objective of mandatorily keeping cash on behalf of banks. The amount is not available for banks to use.
It is important to note that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 percent.
The funds deposited by banks to CBN are not used to create loans. If these funds are with banks, certainly it will enhance their earnings and returns to shareholders. It will create more banking expansion. The deposit fund is meant for bank customers and banks cannot make use of them, according to Boniface Okezie, Chairman, Progressive Shareholders Association of Nigeria.
Some investors are weary about the volatile and unpredictable macroeconomic conditions even as a rebound in crude oil price and relation of social distancing measures helped the country exit a recession.
The country’s currency value is volatile, with a central bank that props up the naira, before sudden devaluations, as happened in March and July. Nigeria has currency controls, adding to investors’ concerns about unpredictability and getting their cash out.
As the Naira continues to weaken, investors are shunning bank stocks while their indifference towards the country’s equity market heightens.
“Where peers like South Africa and Kenya followed the global trend of giving banks more room to lend, Nigeria hasn’t budged. Instead, it stuck with a CRR that compels lenders to park a portion of their deposits with the regulator,” said Mahin Dissanayake, senior director for Europe, Middle East and Africa bank ratings at Fitch.