Income from fixed income securities such as treasury bills that used to be a lifeline to lenders whenever loan books are not expanding has fallen precipitously as lower yields on fixed income securities add to slow growth in earnings
The largest banks in Africa’s most populous nation saw collective income from investment in securities such as government bonds reduce by 16.89 percent to N482.25 billion September 2021 from N580.31 billion as at September 2020, according to data gathered by MoneyCentral.
Of course, banks take advantage of the high yield environment by parking their money in fixed income securities to generate higher returns that helped underpin revenue.
However, central bank governor Godwin Emefiele’s dovish tone over the last three years with a view to stabilising an economy beaten down by sharp drop in crude oil price and inflationary pressure sent net treasury yields crashing.
And investors are increasingly becoming worried that the slow growth in revenue and a bleak outlook for the industry are undermining valuations as evidenced by deteriorating return on equity.
Some of the decisions taken by the apex bank that analysts say are inimical and punitive includes barring individuals and domestic firms from its Open Market Operations (OMO) and the hike in cash reserve ratio to 27.50 a few years ago.
As it stands, Nigeria has one of the highest CRR in the world, which stifles lenders’ ability to extend more loans to the real sector of the economy since they are mandated to keep the chunk of cash with the central bank.
What’s more, analysts see the hike in loans to deposit by the regulator stoke non-performing loans (NPLs), and they added that it makes no sense forcing lenders to extend credit facilities to risky sectors.
The cash reserve ratio is quite high and it affects the net interest margin and return on equity, according to Adesoji Solanke Director – Frontier / SSA Banks & FinTech at Renaissance Capital.
“How the central bank and the government address these challenges will affect the way investors treat equities,” Solanke said.
Combined interest income as percent of income from investment securities stood at 20.07 percent as at September 2021, lower than 2020’s 26.57 percent.
Zenith Bank’s income from treasury bills dipped by 21.22 percent to N101.68 billion in September 2021 from N129.06 billion the previous year.
United Bank for Africa (UBA) saw income from investment securities fall by 0.39 percent to N130.40 billion in the period under review against N130.90 billion as at September 2020.
Guaranty Holding Company or GTCO saw income from fixed income security reduce by 54.94 percent to N37.03 billion in September 2021 from N82.19 billion the previous year.
FBN Holdings income from government bonds fell 48.16 percent to N51.91 billion as at September 2021 from N100.15 billion as at September 2020.
Sterling Bank’s income from fixed income securities were down 35.67 percent to N13.80 billion in September 2021 from N21.45 billion as at September 2020.
First City Monument Bank (FCMB) Plc’s income from treasury bills was down 45.23 percent to N16.05 billion in September 2021 from N29.31 billion as at September 2020.
Union Bank’s income from investment securities dipped 54.31 percent to N8.25 billion in the period under review as against N18.07 billion as at September 2020.
The investment climate is becoming unfavourable for lenders as they are no longer good in generating returns on the investment they received from their shareholders.
But there is light at the end of the tunnel as yields on fixed income securities have been rising since the start of the year amidst strong local demand for higher yields and the need to attract foreign interest in Nigerian securities amid a dollar shortage.
Nigeria 10Y Bond Yield was 12.597 percent on Friday December 20, according to over-the-counter interbank yield quotes for this government bond maturity.