23.2 C
Monday, September 25, 2023

Nigerian Banks Under Pressure to Make Deeper Cost Cuts

Must read

- Advertisement -
- Advertisement -

Top Nigerian banks must make deeper cost cut to drive earnings growth, with revenue expected to remain under pressure for the foreseeable future, analysts said.

Revenue grew at the slowest pace in at least four years at the biggest Nigerian banks in June 2020 as stringent regulations and a sharp decline in short term government securities weighed on trading and recession fears dulled clients’ appetite for borrowing.

But Zenith Bank and FBN Holdings earnings stood out from rivals as they recorded strong profit amid weak revenue growth.

Analysts have warned that net interest income, the difference between what lenders earn on loans and pay on deposit will slow at year end and into the first quarter of 2021, thanks to low yield environment.

With revenues under pressure and other business areas uncertain, expense control may be the only way to boost profit.
In the past five years,  the largest banks have collectively incurred N4.84 trillion in total operating expenses (other operating expenses and staff cost), according to data gathered by MoneyCentral.

A breakdown of the figures shows combined personnel expenses increased by 6.60 percent to N269.52 billion in June 2020 from N252.82 billion as at June 2019.

Other operating expense that includes depreciation was up 16.58 percent to N626.47 billion as at June 2020 from N537.35 billion the previous year.

Access Bank has the largest cost item among its peers, as the lenders wage bills spiked after it acquired Diamond Bank last year.

Access Bank’s total operating expenses spiked by 16.58 percent to N174.28 billion as at June 2020, which is more than double the total operating expenses of largest lender by market capitalization, Guaranty Trust Bank.

“I think a number of banks have streamlined their operations. We have seen closure of branches that will accelerate cost reduction,” said Gbolahan Ologunduro, equity research analysts with CSL Stock Brokers Limited.

Ayodeji Ebo, Senior Economist and Head, Research and Strategy, Greenwich Merchant Bank, sees elevated energy cost for lenders in tandem with the high cost of doing business.

“There will also be a review of staff salary since inflation will have eaten into their disposable income. They will incur more cost given the challenging environment,” said Ebo.

Nigerian banks have embarked on reduction in headcount as latest data released by the National Bureau of Statistics (NBS) showed total staff strength for the banking sector reduced by 9.50 percent year on year (y/y) and 2.60 percent quarter on quarter (QoQ) to 94,498 persons.

Reuters had reported that Access Bank had cut staff salaries and sacked contract workers accounting for 75 percent of its 30,000 workforce to save costs.

There are however limits to the number of workers that lenders can lay-off and they must seek the consent of the central bank before embarking on such an exercise.

To minimize the impact of the coronavirus pandemic on households and the economy, the central bank barred commercial banks from laying off staff.

There has been pressure on efficiency ratios as lenders are unable to turn each Naira invested in revenue into higher profit, while the return on average equity (ROAE) has failed to beat analysts expectations.

Costs are rising at a higher rate than income for Tier 1 lenders otherwise known as the big banks as average industry cost to income ratio increased to 58.40 percent in June 2020 as against 57.70 percent as at June 2019.

For the first six months through June 2020, the top Nigerian banks saw cumulative net income increase by a mere 3.84 percent to N424.11 billion, the slowest growth in four years.

The dovish stance of the central bank in recent times means yields will continue to be low through the year and the first quarter of 2021, which means revenue will be squeezed.

Also, the coronavirus pandemic has resulted in rising bad loans as a lockdown imposed by government to curb the virus hindered customers from meeting their obligations.

There are fears that huge loan loss expenses could undermine profit, as the industry is exposed to deteriorating asset quality since oil companies felt the pains of lower crude oil price.

The combined impairment charge on financial asset for the top banks surged by 111.94 percent to N119.06 billion as at June 2020, according to data gathered by MoneyCentral.


- Advertisement -
- Advertisement -

More articles


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

- Advertisement -

Latest article