Nigerian Banks will any moment from now begin to unveil second quarter (Q2), 2020 earnings and investors will be keen to dissect the numbers to see how lenders were able to withstand the negative economic fallout from the coronavirus pandemic.
The Central Bank of Nigeria (CBN) is already forecasting a -1.03 percent contraction in the second quarter of the year, meaning that most banks will struggle as a result of the challenging macro-environment.
The Nigerian Stock Exchange (NSE) Banking Index is down -23.75 percent year to date, an indication that investors are already positioned for the worst.
Below are some of the major indicators investors should watch out for before triggering buy or sell order on their individual bank shares.
Individual Banks position with NPLs
A pandemic induced lockdown of Nigeria’s commercial and political capitals of Lagos and Abuja for months meant that a lot of businesses and employees lost their incomes.
Some lost their jobs and other agreed to salary cuts in lieu of layoffs. All these meant that millions of Nigerian businesses and individuals with loans outstanding with banks were unable to service them, despite the attempts to provide forbearance by the CBN.
However recent data that came to light may seem to suggest that some banks may have been able to navigate the prospects of higher non-performing loan (NPL) ratios, better than others.
The Non-Performing Loan (NPLs) ratio of Nigerian banks decreased to 6.4 percent at the end of June 2020 from 9.4 percent in the corresponding period of 2019, on account of increased recoveries, write-offs and disposals, the monetary policy committee of the CBN said in a statement yesterday.
What this means is that on aggregate, NPLs fell, however there is no indication of what the individual numbers are, which is sure to negatively impact some Banks Q2 earnings.
The CBN engineered a devaluation of the Naira currency versus the dollar, when it moved the official foreign exchange (FX) rate from N306 to N360 per dollar during the depths of the coronavirus pandemic earlier in the year.
This devaluation will lead to some banks booking FX gains and other booking losses, depending on their net positions in major foreign currencies ahead of the devaluation.
Some banks such as Guaranty Trust Bank, FBN Holdings and UBA are expected to book FX gains in the quarter, according to MoneyCentral sources.
Loan Book Expansion/Contraction
Aggregate domestic credit (net) grew by 5.16 per cent in June 2020 compared with 7.47 per cent in May 2020, according to the CBN.
Furthermore, the CBN’s Loan-to-Deposit Ratio (LDR) initiative has led to the total gross credit increasing to N18.90 trillion at the end of June 2020, from N15.56 trillion at the end of May 2019, according to the MPC.
These loans were largely recorded in manufacturing, consumer credit, general commerce, and information and communication and agriculture.
A slide in fixed income yields since the middle of last year has meant that banks have increasingly needed to perform real banking to earn interest rather than rely on their investments securities.
The banks that are more efficient in expanding their balance sheets to targeted and less risky sectors such as Telecoms will see better Q2 earnings than peers.
Bond Trading/Treasury Operations
This line item will become increasingly important in the coming months as a tough regulatory environment limits banks’ ability to earn interest and non-interest income.
FBN Holdings was particularly a big player here in the first quarter, as it booked capital gains from financial instruments/Investment securities to the tune of N13.50 billion in Q1 2020, compared to N1.59 billion in Q1 2019.
Digital Channels Growth
Any bank whose digital strategy was not up to par before the onset of the coronavirus lockdowns will be playing catch-up compared to peers.
The lockdown and social distancing rules mean that access to ATMs, point of sales, online transactions, App based transactions and USSD were the go to channels for Nigerians to process transactions, which usually come at a fee for banks.
Cost containment measures
One sure profit lever for banks is the ability to control costs and its potential impact on the bottom lines or net income.
For instance, in the first quarter of 2020, Guaranty Trust Bank (GTB), had the least cost-to-income ratio of 40.59 percent (among the 5 tier-one banks, GTB, ZENITH, ACCESS, UBA and FBNH) and conversely was one of the most profitable, as it recorded pretax profits of N58.2 billion.
On the other hand, FBN Holdings had the highest cost-to-income ratio of 65 percent in Q1, 2020 and recorded the lowest PBT among the 5 Banks of N28.7 billion.