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Published On: Tue, Sep 29th, 2015

TSA: Now how will banks make money?

 

By RICHARD MAMMAH, JULIUS ALAGBE and FELIX OLOYEDE

Godwin Emefiele

Introduction of the Treasury Single Account, TSA, by the Muhammadu Buhari administration has sent financial shock waves down the banking services industry. With the expiration of the deadline for the full implementation of the scheme last week, focus has now shifted to how the sector would respond to the attendant challenges that are expected to follow.
Hardest hit perhaps would be Deposit Money Banks, DMBs, which had been long nourished on funds from the Ministries, Departments and Agencies, MDAs.
While the full scope of the challenge is yet to be fully underscored, one point that is clear to analysts is the inevitability of an interest rate spike.
This is attendant upon the loss of funds by the DMBs to the Central Bank of Nigeria, CBN, who within the new regime would be the primary custodians of government funds.
It will also challenge the banks to implement policies designed to boost a return to the practice of aggressive retail banking. And then there is the potential escalation of fees for all kinds of services being rendered.
Gross Earnings portfolio
The new challenge is coming on the heels of earlier developments in the sector.
In 2014, for example, the bigger deposit money banks had posted fairly impressive improvement in their top line financial statement items. Aided by its size, scope and longevity, FBN conveniently declared a 21.3% rise in gross earnings from N396 billion in 2013 to N480.6 billion at the end of financial year 2014.
On its part, Zenith Bank also achieved a 14.79% increase in gross earnings from N351.5 billion in 2013 to N403.3 billion in 2014.
Equally, GTBank’s gross earnings rose by 14.75% in 2014 as it grossed N278.5 billion, up from N242.7 billion in 2013.
Presumably on the back of increased scale of operations that followed its incorporation of the erstwhile Oceanic Bank as well as its own self-assigned recapitalization mandate, Access Bank Plc’s gross earnings moved up by 18.51% from N206.9 billion in 2013 to N245.2 billion in 2014.
As for UBA Plc, its gross earnings grew by 9.56%; from N264.5 billion in 2013 to N290 billion at the end of 2014.
Profit before tax
Even as the sector witnessed a surge in overall earnings, the story at the profit end of bank books was mixed.
FBNH for example was only able to raise profitability by 1.75% in 2014, a pointer to what some analysts believed was its difficulty in managing rising overhead expenses as cost of finance continued to erode profit from operations. In the first half of 2015, the trend persisted but optimists believe that end of year adjustment may vote in favour of the holding company, particularly if it is able to manage the ongoing TSA threat.
While FBNH struggled with profitability, Zenith Bank demonstrated that profitability was a function of agility. The bank’s operational focus led to a 12.81% spike in pre-tax profit from N106.2 billion in 2013 to N119.8 billion in 2014. In its first half year result for 2015, the bank showed that regardless of a recession it could still turn a tidy profit. Analysts explain that the result was the outcome of a combination of economic efficiency, a robust business model and a strategic approach to product marketing.
On the other hand, the performance of UBA Plc was patchy. In 2014, the bank’s pretax profit jerked up marginally – less than 1%- to N56.2 billion from N51.2 in the corresponding year. This was traced to low business penetration in the course of the year. However, the bank’s first half result in 2015 showed promise. Analysts are of the opinion that the management seems to have woken to the task of improving operational efficiency by cutting back on avoidable overheads. But there is presently the added burden of a TSA-induced liquidity squeeze.
Assets
FBNH’s asset was valued at N4.34 trillion in 2014. This was an increase of 12.24% above the corresponding year value of N3.869 trillion. The bank’s asset growth though commendable carries with it concerns over the capacity of the institution to sustain a competitive return on fresh assets.
While FBNH did a 12.24% increase in total assets, Zenith Bank Plc saw a need to raise its total capital employed for banking operations by 19.48% to N3.755 trillion from N3.143 trillion in 2013. Also, Zenith Bank currently provides a higher average return on asset to investors.
UBA, on the other hand, pushed up total assets by 4.55% to N2.76 trillion from N2.64 trillion in 2013. The bank’s balance sheet was put on pause mode of sorts, leaving its management with a renewed challenge to rethink its operational strategy. There has also been the old bogeyman of regulation ripping into the delicate fabric of the bank’s assets. Slowing down of deposit liabilities has hobbled the bank’s ability to grow short term assets by way of increasing loans and advances.
GTBank Plc equally ponied up on Zenith bank’s growth in financial assets and earnings. GT’s total assets rose by 17% to N2.36 trillion from N2.01 trillion in 2013. Access Bank on the other hand achieved a 14.65% balance sheet size expansion to N2.10 trillion from N1.84 trillion in the corresponding year.
Ogochukwu Ndubuisi, a consultant in Lagos said that the first half result of these banks signal what we should be expecting at the end of the year. Most of the cutbacks will affect top and bottom line growth even as some banks are seeking capital injection from rights issues. They noted that the treasury single accounts have started to impact their cost, which will further pressure their ability to grow their earnings. To cut costs, banks will be forced to lay off staff in the next quarter.

 
Dr. Boniface Chizea, Managing Director, BIC Consultancy Services Limited, said the analysis of banks’ financial balance sheet show that most of the revenues come from fees’ income. He also added that banks make money from investments on bonds and treasury bills, noting that they now need to scale down their recurrent expenditures to reflect the shortfall in their revenue as well as shed assets in order to cut costs.
Mr. Emma Nwosu, former Managing Director, defunct ACB International Limited, advised banks to improve on service delivery, which will bring about customer satisfaction and in turn increase their deposit base.

 

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