As Treasury-bill rates continue to fall, while asset yields are trending south, making it almost impossible to re-price liabilities to match, banks operating in Nigeria have been warned to either find other sources of income or face an average of 15 per cent drop in their Profits Before Tax (PAT) expectation for 2018.
It is worthy of note that most of the banks operating in the country have had an easy time, earning good income on risk-free government-backed, Naira-denominated securities in the last two years.
But researchers at Coronation Merchant Bank in a new report disclosed that that era is drawing to a close as T-bill rates fall.
According to the Head of Research, Guy Czartoryski, for the banks to replace the portion of income threatened by declining yields on securities, they must grow risk-weighted assets. This means a 6-12 per cent rise in customer loans in 2018.
”The ability to support risk asset creation in the real sector will differentiate winners from losers in the Nigerian banking industry over the next three years”, Coronation Researchers stated.
While the quality of asset in the industry is generally improving, the firm believes the best capitalised banks will move well ahead of their competitors.
The report categorises banks into three tiers; Group ‘A’, ‘B’ and ‘C’. Banks in the first group, being the most well capitalised, have the biggest opportunity to increase consumer lending.
According to the report, Group A includes Zenith Bank, GTBank and Stanbic IBTC, which have the ability to significantly expand their loan books by 69 per cent, 82 per cent and 182per cent respectively.
Zenith Bank, GTBank and Stanbic IBTC
Group B, including United Bank for Africa (UBA), Access Bank and Fidelity Bank, have moderate capital levels and some ability to expand loans books but may also pursue tier II capital raise in the form of long-term subordinated debt.
Group C including FBNH, Diamond Bank and Sterling Bank, in the short to medium term, have limited ability to expand their loans books and will most likely focus on dealing with capital issues and might attempt to raise long term capital from the capital market.
According to the report, “if equity markets are sufficiently strong, some banks might attempt equity capital increases (Tier-I) this year.
However, currently we have market valuations so low as to make equity capital dilute the interest of existing shareholders. So, the preferred capital-raising route is likely to be long-term subordinated debt (Tier-II).
We expect market share in customer lending to flow from banks in Group C towards those in Group A. With banks in Group Bwe see some, but perhaps not significant, market share gains.”
Leaving capital raising aside, 2018 presents a golden opportunity for the stronger banks to expand loan books and gain market share. Nigerian banks are coming off a low base: lending (when adjusted for currency depreciation) has hardly grown over two years, but the economic conditions look good for renewed loan growth.
Loan growth, over the last two years, has been far from impressive and understandably so, since banks have remained cautious as they have grappled with the effects of oil price volatility and its impacts on their loan books.
”Even though we believe the underlying pressure on loan assets is getting lighter, there is still IFRS 9 to contend with. We expect a one-off uptick in impairment charges this year, given that banks will start reporting using IFRS 9 this quarter.
”With oil prices largely stable and our optimistic economic outlook for 2018, we view the risk to banks’ oil portfolios as significantly reduced.
Also, the stability in the foreign exchange market, coupled with renewed economic growth, significantly mitigates the risks associated with the trading and manufacturing sectors of the economy”, the report stated.
Meanwhile, Guaranty Trust Bank in its 2018 first quarter results, declared a profit after tax of N44.7 billion, which represented a 7.7 per cent growth from N41.5 billion recorded in the same period of 2017.
As for Zenith Bank Plc, it announced an increase of 25.5 per cent in profit in first quarter (Q1) of 2018 to N47.8 billion as against N37.5 billion reported in first quarter of 2016.
This growth in interest income translated into an improved Profit before Tax (PBT) growth of 22.2per cent and a Profit after Tax (PAT) increase of 25.5 per cent compared to March 2017, at N54 billion and N47 billion respectively.
Also, Stanbic IBTC Holdings Plc, a member of Standard Bank Group, has announced its three months unaudited results for the period ended March 31, 2018, recording a growth of 44 per cent in post-tax profit.
The bank, recorded a profit after tax increased to N23.1 billion, from the N16.1 billion posted in the corresponding period of 2017. Profit before tax made a similar progression during the quarter, from N18.6 billion to N26.7 billion, an increase of 43 percent recorded in the comparable period of 2017.