There has been little or no profit growth for the majority of Nigerian banks who are beset by a challenging operating and regulatory environment even amid a significant reduction in impairment charges on financial assets.
Perhaps more worrisome is that they are no longer good at generating returns on the investment they receive in their shareholders, given that inflationary pressures and currency volatility are ballooning operating expenses.
McKinsey and Company in a recent projected banking revenue to return to pre-crisis level between 2022 and 2024, depending on whether a rapid or slow recovery prevails, which means the industry faces a prolonged period of uncertainty.
The combined net income of the largest and most liquid lenders was flat at N660 billion as at September 2021, according to data gathered by MoneyCentral.
That compares with 4.07 percent increase at the bottom line to N658.29 billion in 2020; the slow growth in this period is due to the coronavirus induced loan loss expense as a lockdown imposed by the government to curb the spread of the virus hindered customers from meeting their financial obligations.
Combined net income was up 11.39 percent to N632.49 billion as at September 2019, while profit rose 14.97 percent to N567.78 billion in 2018 financial year.
Cumulative net income grew by 17.84 percent and 20.10 percent to N493.84 billion and N419 billion in the 2017 and 2016 financial years, and it will be recalled that the rebound in crude oil price and the introduction of the Investors’ and Exporters’ Window in 2017 eased the flow of foreign currency in the system as the country exited its first recession in 25 years.
Interestingly, there was a single digit growth of 6.53 percent to N348 billion in 2015, as the banking industry was gradually feeling the pang of the precipitous drop in crude oil price of mid-2014 that exposed that to the oil and gas as asset quality deteriorated.
Profitability is being dampened by the Cash Reserve Requirement (CRR), which, at 27.5 percent, is among the highest in the world. The CRR requires banks to park an increasing amount of local-currency deposits with the central bank, and restricts their ability to lend as these reserves are only available for intervention funds.
“One of the major concerns is the cash reserve policy of the central bank; and we think the effective cash reserve ratio is 40 percent, which means for every 40 percent of naira deposit that the Nigerian banks take, they need to keep that at the central bank earnings 0 percent,” said Adesoji Solanke, Director, Frontier/SSA Banks and Fintech at Renaissance Capital.
“This has significant negative implications for the banks’ net interest margin, and ultimately their ability to deliver a return on equity, which is a key driver on how investors value those banks in any market,” Solanke said.
He added the central bank’s capital controls and foreign exchange policy are stoking investors’ apathy towards equities.
Profitability has also fallen due to receding revenue amid low loan growth and lower interest on government securities brought on by central bank’s dovish stance.
Analysts have warned that foreign currency liquidity will remain strained as a result of foreign currency shortages.
Hitherto, banks relied on juicy yields that encouraged them to park their money in government debt, while devaluation of the currency bolstered foreign currency gains that added impetus to earnings.
While gains in fees generated from mobile money and current account services help subdued a slump in interest income, banks have a responsibility to reduce rising operating expense that are within their control for them to be able to record profit growth.
Guaranty Trust Holding Company’s net income dipped by 9.10 percent to N129.40 billion as at September 2021. Return on average equity (ROAE) fell to 20.80 percent in the period under review in 2021 from 26.80 percent as at September 2020.
FBN Holdings net income reduced by 24.80 percent to N40.85 billion in the period under review from N54.35 billion the previous year.
“A key downside risk to earnings is the uncertainties in the political environment, as likely fiscal distractions and politicking ahead of the 2023 elections may undermine corporate investments and slow down expected implementation of the National Development Plan 2021 – 2025,” said an analyst who did not want his name mentioned.
Zenith Bank, the largest lender by market capitalistion, saw net income grow by a meager 0.80 percent to N160.59 billion as at September 2021, and that compares with 35.84 percent uptick in 2017. ROAE reduced to 18.60 percent in September 2021 from 21.50 percent the previous year.
Stanbic IBTC Holdings Plc’s net income fell by 39.60 percent to N39.94 billion as at September 2021, and that compares with 86.96 percent surge at the bottom line in 2017. ROAE fell to 10.80 percent in the period under review from 19.40 percent the previous year.
However, some lenders bucked the trend as they recorded double digit returns to stockholders and profit.
Access Bank, the lender whose earnings have been growing since the acquisition of Diamond Bank a few years ago, saw net income increase by 19.10 percent to N121.89 billion as at September 2021.
United Bank for Africa (UBA)’s net income spiked by 35.60 percent to N104.59 billion as at September 2021. ROAE increased to 19.20 percent in September 2021 from 16.40 percent the previous year.
Analysts have urged chief executive officers to intensify their digital baking strategy and diversify their earnings streams because the regulatory environment is becoming increasingly and erratically volatile.
“The shape and the resilience of the industry post pandemic will depend on how stakeholders respond now. It’s time for bold choices and decisive execution—the faster the better,” said the McKinsey report.