Published On: Mon, Mar 19th, 2018

Banks search for lending opportunities

…explore FOREX, trade finance and other businesses

By FELIX OLOYEDE

The thinning out of yields in Nigeria’s fixed income market has spurred banks to look for new sources of revenue in 2018. A large number of banks in 2017 took advantage of the federal government’s aggressive borrowing by way of domestic bonds to earn risk free yields in the region of 18 per cent at some point in the year. By the second half of 2017 bond yields had gradually started to fall as increasing federal revenue from rising international oil prices made the government less frantic for cash.

Data obtained from Debt Management Office (DMO) showed that the government borrowed N1.53 trillion from the local market last year, propelling domestic debt burden to rise 14 per cent to N12.59 trillion at the end of 2017. Banks took advantage of the government’s increasing debt appetite to grow their revenue as the economy slowly recovered from a 16-month recession.

For instance, Zenith Bank, one of the two commercial lenders that has released its full year financial result for 2017, witnessed a 456 per cent rise in securities trading gains to N157.97 billion compared to N28.4 billion in 2016 with treasury bills trading climbing 928 per cent to N88.9 billion and derivative income increasing 242 per cent to N68.71 billion during period from N20.08 billion in 2016. GT Bank also improved its revenue from securities and foreign exchange activities by 117 per cent to N11.34 billion in 2017 underpinned on 166 per cent year-on-year rise in bond trading to N130.58 million, treasury bills trading which surged 206 per cent to N4.04 billion and forex trading which also increased 86 per cent N7.17 billion during this period.

But due to the uproar that greeted crowding effect of government domestic debt on the private sector, it has resolved to refinance local borrowings with external debts. The government has raised $.3 billion from its planned $5.5 billion Eurobond to refinance local debts. Yield on Nigeria’s 10 year bond which was almost 17 per cent in September 2017, has dropped to 13.52 per cent in spite increased 0.06 percent last Friday.  This will stifle revenues banks would get from the fixed income market this year and they are searching for new revenue options.

Government decision to cut down its local debt profile has driven commercial lenders to consider other income options like trading financing, opening of Letters of credits, forex and so on, said Johnson Chukwu, managing director, Cowry Asset Management Company Ltd. “Banks will definitely look for outlets to lend with the liquidity that is coming back to them. They will be looking for lending opportunities. A lot of emphases will be on trade. Luckily trade sector has recovered in the economy. Trade is short cycled and there is also improved forex liquidity,” he explained.

And as a result of the lull in the economy in 2016 and first half of 2017, many banks significantly sliced credits to the real sector, which was adversely affected by recession as non-performing loans (NPLs) soared to over 17 per cent last year against the 5 per cent prudential. Despite the country’s economic recovery in Q2 2017, average non-performing loans (NPLs) ratio in the Nigerian banking industry ballooned to over 17 per cent against the 5 per cent prudential threshold set by the Central Bank of Nigeria (CBN). Worried by this trend, the regulator recently barred banks with NPL ratio above the 5 per cent benchmark and low capital adequacy ratio from paying dividends for the 2017 financial year.

Commercial lenders have taken different measures to drive down the level of their toxic debts. Zenith Bank for instance, despite chopping loan book  -8 per cent y-o-y to N2.1 trillion, its impairment provision soared by a whopping 204 per cent to N98.23 billion in Q4 2017 against N32.35 billion in the preceding year. In the same vein, GT bank risk asset dipped -8.9 per cent from ₦1.590 trillion recorded as at December 2016 to ₦1.449 trillion in December 2017  and its NPL ratio increased to 7.7 per cent in December 2017 from 3.7 per cent in December 2016 largely as a result of classification of a single exposure within the Nigerian Telecommunications Industry.

In the face of increasing liquidity in the banking sector, banks have been reluctant to extend credits to the manufacturing sector and the SMEs sector because of their associated risks. They feel lending to these sectors would worsen the industry’s already high NPLs situation.

But Akintoye Ayorinde, analyst, Research and Securities, Afrinvest believes banks will be more willing to give credits to the real sector in order to increased their interest incomes. “Our banks will always resilient. They will always find avenue to increase the revenue. They will begin to lend more actively to the real sector of the economy. Last year they were not lending to the real sector because it was not doing well. They were put money in government bonds and treasury bills rather than lend to the real sector.

“Interest rate is likely to go down further, because when the MPC meets later in the year, it is likely to reduce interest rate, which will affect the fixed income market. So, in order to maximize profit, they will be lending to the real sector. Mostly, small banks that don’t have the capital vigour of taking the risk of increasing credit to the real sector would see their performance drop in 2018. So, the customer space will be the best performing sector for 2018,” he argued.

Commercial lenders would further explore forex market this year, following improved liquidity in the market, which enable more manufacturers to buy foreign currencies for procurement purposes.  “Banks can still make a kill from exchange transactions, because the spread between the autonomous market and the official market is still high. More so, the oil and gas sector is fully back in terms of price and output. Banks have made kill from the sector in the past, I think they do it again,” claimed Moses Ojo, Head, Research and Business Development, PanAfrican Capital Plc.

Meanwhile, banks are beginning to turn their attention to the private sector as credit to the sector improved marginally 2 per cent to N22.29 trillion in December 2017 from N21.96 trillion in November.

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