 has been diminishing over the past years, validating the tepid growth in profit){kind=link}
The banking sector Return on Equity (ROE) has been diminishing over the past years, validating the tepid growth in profit as the central bank’s stringent policies are battering revenue.
An analysis by MoneyCentral reveals that average industry ROE for the largest lenders in the first quarter of 2021 was just 13.07 percent and is lower than 17.48 percent and 15.78 percent in 2019 and 2018 respectively. Since 2019, the ROE has been on the decline overall for the sample of banks analysed.
The five-year analysis also proves that the low figure in 2021 is not unique given the COVID-19 pandemic that stoked rising impairment charges on financial assets and the low interest rate that marked the end of free money.
Banks have been seeing slower profit growth since October 2019 when the central bank barred individuals and local corporates from buying its Open Market Operations auctions, sending net treasury yields crashing to an unprecedented level.
Analysts have warned that the harsh regulatory environment and economic downturn is preventing the management of banks from generating enough growth from their equity financing.
Their profits have been growing slowly and revenue deteriorating due to the low yield environment as the decision of the central bank to prohibit individuals and local corporates from its Open Market Operations sent net treasury yields crashing.
Analysts have warned that the decision of the regulator to hike loans to deposit ratio to 65 percent risks stoking rising non-performing loans (NPLs).
They added that forcing banks to hold 27.50 percent of deposit as reserves does not add up, and that swooping on reserves for failure to meet the CRR requirement authority is sucking excess liquidity out of the system that could have been used to buy foreign exchange thereby supporting the naira.
“Nigerian banks are having to work significantly harder than banks elsewhere in the world to deliver profitability,” said Renaissance Capital analyst Adesoji Solanke, adding that the cash reserve ratio is the highest among major frontier and emerging markets tracked by the brokerage.
“The higher cash reserve ratio, which aims to combat inflation by removing excess cash from the financial system, also compels banks to borrow and take extra trading risks,” said RenCap’s Solanke.
The largest bank by market capitalization Guaranty Trust Bank has seen its ROE down to 22.06 percent in March 2021 from 30.80 percent in 2018, according to data compiled by MoneyCentral.
Zenith Bank’s ROE slumped to 21.10 percent as at March 2o21 from an all-time high of 26.47 percent in 2018.
FirstBank Holdings Plc’s ROE reduced to 8.22 percent in the period under review from 13.12 percent the previous year.
Stanbic IBTC Holdings Plc’s ROE dipped to 11.82 percent as at March 2021 from an all-time high of 48.41 percent in 2018.
Sterling Bank Plc’s ROE fell to 7.16 percent in the period under review from 12.25 percent the previous year.
First City Monument Bank Plc’s ROE fell to 6.26 percent in the period under review from 9.13 percent the previous year.
However, some of them have bucked the trend. Access Bank’s ROE increased to 27.22 percent in the period under review from 24.13 percent the previous year. United Bank for Africa (UBA) saw ROE move to 20.53 percent in March 2020 from 18.21 percent as at March 2020.
The 12 banks analysed by MoneyCentral reveal that combined net income increased by a meagre 1.89 percent to N239.97 billion as at March 2021.
And that compares with 6.05 percent, 11.21 percent, and 16.51 percent increases in the financial years in 2020, 2019, and 2018 respectively, according to data gathered by MoneyCentral.
The banks have to deal with economic shocks, short credit cycles and persistent problems in the oil sector. They also have to deal with policy actions, policy uncertainty and regulatory risk, according to Mahin Dissanayake director for Europe, Middle East and Africa bank ratings at Fitch.
“Nigerian banks compared to other markets operate in a volatile environment,” Dissanayake said.