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Friday, March 24, 2023

Fee Income Helping Nigerian Banks Navigate Lower Interest Margins

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Banks fees generated on digital transactions, including mobile money payment and current account servicing fees have offset a slow growth in net interest income, but rising operating expenses continues to undermine profit.

Analysts have said a punitive regulatory environment that soured juicy yields will force lenders to think out of the box and strengthen their electronic business revenue, adding that financial technology is the next growth phase of the Nigerian economy.

The largest banks in Africa’s largest economy saw cumulative interest income dip by 1.18 percent or N24.67 billion to N2.07 trillion as at September 2021, according to data gathered by MoneyCentral.

But that was upset by a higher combined fee and commission income which spiked by 27.77 percent or N107.23 billion to N493.19 billion in the period as lenders are ramping up spending on information and communication technology, relying on digital technologies to attract customers.

FBN Holdings lower net interest income which was down by N12.72 billion or 8.7 percent to N133.34 billion (after impairment charges) for the period was largely offset by higher net fee and commission income which surged by 17.68 percent or N12.91 billion to N85.89 billion.

Zenith Bank’s interest income which was down N9.97 billion or 3.17 percent to N308.84 billion was offset by higher fee and commission income which spiked by 32.43 percent or N19.17 billion to N78.29 billion.

Guaranty Trust Holding Company or GTCO’s lower net interest income which was down N22.64 billion to N179.59 billion for the period was nearly offset by net fee and commission income which surged by 58.38 percent or N19.10 billion to N51.83 billion.

It should be noted that fees and commission is growing faster than the rate of growth in interest income, but net profit still remains pressured by regulatory induced charges such as AMCON charge and inflationary pressures.

Since interest rates are monetary policy tools beyond the control of banks, analysts have urged them to control operating expenses so as to bolster margins.

Of course, the regulatory environment has been unfriendly and lenders have lost significant income from treasury bills due to the decisions of the central bank to bar individual and domestic firms from its Open Market Operations (OMO), which saw net treasury yield nose dive.

Nigerians banks are having to work significantly harder than their counterparts elsewhere as the cash reserve ratio (CRR)-which is at 27.50 percent- is one of the highest in the world.

That is on top of the hike in loans to deposit ratio to 65 percent by the regulator, which forces lenders to extend credit to risky sectors and could stoke rising non-performing loans.

“The liabilities of banks are repricing faster than the assets, which is reflective of the fact that the tenor of the assets are longer than the duration of the liabilities. So, as liabilities (mainly deposits) mature, they are repriced or refinanced at a higher rate, albeit assets (mainly loans) mature at a longer period and borrowers resist attempts to reprice the loans,” said an industry analyst.

“For instance, a 3-year loan granted at 12% per annum in 2020 when interest rate was historically low was funded at the time with equally low 60-day deposits of say 3% per annum,” said the analyst.

 The central bank has said it is imperative to curb inflation and stabilise an economy recovering from the coronavirus pandemic.

There is light at the end of the tunnel for the industry as rating agencies are sanguine that the gradual reopening of the economy, acceleration in rollout of vaccines, and some measures taken by the government will help stabilise sovereign credit ratings of banks.

 Moody’s Investors Service (Moody’s) has affirmed the B2 long-term local and foreign currency deposit ratings as well as senior unsecured ratings, where applicable, of the following Nigerian banks: Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Plc (recently renamed “Guaranty Trust Bank Limited”), Union Bank of Nigeria plc, Fidelity Bank plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc.

At the same time, the rating agency changed the outlook on all the banks’ long-term deposit ratings to stable from negative.

“The divergence in impact across the banks would be a determined by the agility and capacity of each bank to reprice its loan book, especially as the higher interest rate has increased the cost of funds of all banks, especially the tier-2 and tier-3 banks, which have had to raise deposits rates to grow or at least sustain deposit portfolios,” summed the analyst.

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