Higher Interest Rates Balloon Banks’ Net Interest Income, Raises Risk for NPLs

Rate hikes by the Central Bank of Nigeria (CBN) have helped Nigerian banks earn more from net interest income (NII), although rising borrowing costs is raising the risks of increased non-performing loans (NPLs).

The country’s largest lenders collectively realised N1.50 trillion in net interest income (NII) in the first six months of 2023, which is 42.52 percent higher than 2022’s N1.05 trillion, according to data gathered by MoneyCentral.

Net interest income is a financial performance measure that reflects the difference between the revenue generated from a bank’s interest-bearing assets and the expenses associated with paying on its interest-bearing liabilities.

A typical bank’s assets consist of all forms of personal and commercial loans, mortgages, and securities. The liabilities are interest-bearing customer deposits.

It is note noteworthy that a high interest rates environment brought on by CBN’s tightening policies to control rising inflation rates has been bolstering banks’ earnings since the first quarter of 2022.

Of course, the war between Russia and Ukraine has aggravated inflation and forced central banks across the globe to embark on tightening cycles.

United Bank for Africa (UBA) Plc leads the pack as its N278.11 billion net interest income (NII) is the largest in the entire banking industry; followed by Zenith Bank, (N261.86 billion); First Bank Holdings, (N237.33 billion); Access Holdings, (N213.56 billion); Guaranty Trust Holdings, (N177.45 billion); Fidelity Bank, (N108.28 billion); Stanbic IBTC Holdings  (N72.68 billion); First City Monument Bank Plc, (N72.21 billion), and Sterling Bank, (N45.13 billion).

The CBN has raised monetary policy rate to a record 18.75 percent, but the regulator has postponed the MPC meeting indefinitely even as data from the National Bureau of Statistics (NBS) showed inflation rate surge to an alarming 25.80 percent in August, a notable jump from July’s 24.08 percent.

There are increasing concerns that the regulator will continue to hike interest rates to subdue red hot inflation that is waging war on Nigerians, exacerbated by the new reforms of president Bola Ahmed who removed the subsidy on premium motor spirit (PMS) and backed free floating of the exchange rate.

A persistently higher interest rate could make banks book huge paper losses on the some financial assets in their balance sheets as seen with the some large regional banks in the United States.

Monetary policies are a double edge swords that either make or mar a lender. For instance, the currency devaluation which resulted in foreign exchange gains is ballooning impairments on financial assets.

The largest banks saw their combined impairment on financial assets surge by 472.60 percent to N602.18 billion in June 2023 from N105.16 billion as at June 2022.

“Some foreign exchange (FX) obligors have also seen relative impairment in their ability to service their loans, especially those with Naira revenues but FX loans, thus the stage 2 loans also required more provisions in line with the signs of stress on the customers’ repayment capabilities,” said Abiola Rasaq, economist and former head of investor relations at UBA Plc.

“Whilst GTBank’s impairment charge isn’t as high as Zenith, it also has an elevated provision for loan delinquencies, as expected in an FX transition cycle,” said Rasaq.