Banks’ huge profits, amidst headwinds, divide analysts

BY EMEKA EJERE

Analysis of recent performances across the income lines of deposit money banks (DMBs) in the country suggests that unlike other business concerns, the lenders are posting impressive figures that can raise integrity questions in an ailing economy.

Ideally, as the life wire of an economy, the banking sector is supposed to be a reflection of the state of an economy, growing profits when the vital economic indicators are pointing to the right direction and struggling when the reverse in the case.

But that does not seem to be the case in Nigeria at the moment. Despite domestic and global economic headwinds, nine DMBs in the country declared N346 billion profit after tax in the first quarter of (Q1) 2023, an increase of 29.3 per cent over N267.69billion reported in the first quarter of 2022.

The growth rate of real gross domestic product (GDP) is often used as an indicator of the general health of the economy. An increase in real GDP is an indication that the economy is doing well. According to the National Bureau of Statistics (NBS), Jonathan Administration had 6.07 percent growth in four years, but the economy grew by an average of 1.40 percent under President Mohammadu Buhari.

However, due to naira redesign policy and the consequent cash crunch, which resulted in severe hardship for Nigerians, the nation’s GDP declined by 2.31 percent in the first quarter of 2023, according to the NBS. Almost all sectors of the Nigerian economy have been experiencing excruciating strains in the past seven years, according to various economic reports.

The World Bank, in its 2022 Nigeria public finance review report titled, ‘A Better Future for All Nigerians’, said Nigeria’s development had stagnated since 2015.

“Nigeria’s development progress has stagnated. Between 2001 and 2014, Nigeria was a rising star in West Africa, with an average growth rate of seven per cent per year, and it ranked among the top 15 fastest-growing economies in the world”, the bank noted.

“However, this trend ended abruptly in 2015, as oil prices fell, the security situation deteriorated, macroeconomic reforms were reversed, and economic policies became increasingly unpredictable,” it added.

During her first quarterly press briefing in 2023 in Lagos, the National Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), decried the worsening business environment in the country that has left many industrial and manufacturing concerns in comatose while several others have shutdown.

President of NACCIMA, Mr. John Udeagbala, stated that the Finance Bill 2022 that was passed by the National Assembly would have negative impact on the Nigerian private sector. “The 2022 Finance Bill attempts to add more financial burden on the private sectors that are presently struggling to keep businesses afloat,” he said.

He also stressed the need for Nigeria to embark on a structural adjustment that would transform the country’s economy from consumption to production in order to halt the steady decline of the Nigeria’s GDP, which has consistently been dropping quarterly since the second quarter of 2021.

“As a matter of fact, the GDP growth rate has been dropping on a quarter -by-quarter basis since the 5.01 per cent recorded in the second quarter of 2021. The implication of this is that economic activities are contracting, and businesses are dying. The private sector has suffered humongous losses due to the absence of turnaround targets for the basic needs of businesses in Nigeria,” he said.

Beating the reality

The nine banks whose unaudited Q1 2023 results were reviewed are: Access Holdings Plc, Zenith Bank Plc, Guaranty Trust Holding Company Plc (GTCO), United Bank for Africa Plc (UBA), Ecobank Transnational Incorporated (ETI), Wema Bank Plc, Union Bank of Nigeria Plc, FCMB Group Plc and Stanbic IBTC Holdings

The lenders reported N1.14 trillion interest income in Q1 2023, an increase of 45 per cent from N788.2 billion in Q1 2022, amid Central Bank of Nigeria (CBN) hike in Monetary Policy Rate (MPR) to 18 per cent.

Analysis of the banks’ results showed that Access Holding declared N71.66 billion profit in Q1 2023, an increase of 24 per cent from N57.83billion in Q1 2022, while Zenith Bank posted N66.01billion profit after tax, an increase of 13.43 per cent in Q1 2022.

GTCO came third as the most profitable bank, declaring N58.17billion profit after tax in Q1 2023, an increase of 35 per cent from N43.21billion reported in Q1 2022. UBA in the period declared N53.6billion profit after tax in Q1 2023, an increase of 29 per cent from N41.5billion in Q1 2022.

Pan-African bank, ETI announced N40.41billion profit in Q1 2023, an increase of 5.4 per cent from N38.32billion in Q1 2022, while Stanbic IBTC Holdings reported N28.86billion profit, an increase of 92 per cent from N15.07billion in Q1 2022.

Union Bank posted N12.63billion profit in Q1 2023, an increase of 128 per cent from N5.55billion in Q1 2022; FCMB Group announced N9.3billion profit in Q1 2023 from N5.2billion in Q1 2022 and Wema Bank declared N5.38billion profit in Q1 2023, an increase of 88 per cent from N2.86billion reported in Q1 2022.

Group Managing Director/ Chief Executive Officer, UBA, Mr. Oliver Alawuba, in a statement said despite the high inflationary, and challenging global environment, the Group was able to leverage the uptick in interest rates and improved digital offerings, in growing funded and non-funded income.

He said, “For 2023, we remain committed to improving the Group’s performance as we strategically position our entities to take advantage of emerging developments within their jurisdictions and across the globe. We will continue to deliver excellent rewards to our stakeholders.”

The CEO of Ecobank Group, Jeremy Awori in a statement said: “Our results for the Q1 2023 showed progress despite the challenging global and regional macroeconomic environment. Once again, we have demonstrated the resilience of our pan-African diversified business model, efficiency, balance sheet stability, deep customer relationships and the hard work of our 14,000+ Ecobankers.”

Also, MD/CEO, Union Bank, Mudassir Amray in a statement said, “A great start to 2023 with encouraging Q1 results. The strategy we put in place is working. We still have a long way to go, as we have ambitious targets. However, we are committed to developing the right balance between convenience and security.”

Regulatory questions

Speaking with our correspondent, Prof Leo Ukpong, of University of Uyo argued that only unethical practices and regulatory gaps can explain the banks making huge profits in an unhealthy economy.

His words: “It is not normal for banks to be declaring huge profits in a weak economy. The heart of banking profit should be from the spread between the deposit and the loan, that is, what they charge on loan and what they pay those who deposit money. That should be the core source of income for any bank.

“Anytime you don’t have that as the principal or the bulk percentage of the profit, of course the bank is doing something that is not right or the regulatory system is weak. If you analyse the banking profit, it’s coming from other types of income, mainly transfer transaction income and SMS charges and all that.

“Secondly, most of the profits you’re seeing now (Nigeria is a cash economy), is because they (banks) force people to use cashless way of doing business but the charges are too high. Relatively the charge is one of the highest in the world.

“Now if you go to the bank, the most you can withdraw in a day is N20, 000. Even the market people – traders who normally use cash – today they’re forced to use card. And some of them use vendors, not even their own telephone to do this transfer, and the vendor will place another charge on them. And the bank takes a cut on all those different levels.

“So when you look at the details of that profit, it’s transaction costs and it’s mainly from card and that accounts for about 70 percent of their profitability.

“The next level, which is maybe about 20 percent, is from loan. The interest rate on loan that they charge in Nigerian banks is about 15 to 20 percent. In other words, it’s like they are charging you 25 percent loan interest and charging 5 percent interest on your savings annualized. That is too high. Go to the most intensive banking countries, that spread is about 5 percent.

“So the regulatory agencies – the central bank and all the rest- are not regulating the banks through that spread. That spread is too high. That is the reason. So they are capitalizing not on economic performance but on regulatory weakness. So the central bank should have done something to come up with a framework to push down the loan interest, it’s too high.

“Our own monetary policy rate is about 18 percent or so. Japan is about 1 percent; U.S is about 2 or 3 percent. So you can see that benchmark is too high. Weak central bank monetary policy is making commercial banks rich.”

Prof Ukpong cautioned against using commercial bankers as CBN governors, stressing that central bank is different from private banking.

“I want to go on record. Do not make a private banker to be a central bank governor. He will make money for the private banks”, he said.

“Central bank is completely different from private banking. The job of central bank is to keep the cost of doing business down. The objective of private bank is to do the opposite so that they can make money.

“Because they have destroyed the whole banking structure, banks will make money even in a bad economy. If they move that N20, 000 withdrawal limit perhaps to what it was – N500, 000, people will withdraw cash and do their business, they won’t be using ATM card and that will bring down their profit”.

However, in an interview with Business Hallmark, a financial consultant and Senior Partner at Modilim and Co, Dr Patrick Modilim, blamed the CBN and the government for the high rates charged by the banks, which he said is the only way the lenders can remain in business in the face of tough regulatory environment.

Modilim said, “No bank makes 10 percent of shareholders’ money. If you check what banks are making and people are calling huge, it’s about 5 percent of shareholders’ money.

“So compare what they have at their disposal and what they’re taking, you see that they’re not making money like people think.”

On why Nigerian banks are charging high interest rates on loans compared to what obtains in other climes, the former banker said; “if a bank takes are deposit of N10 million, how much can the bank lend?”

“If you take a deposit of N10 million, the CBN has increased Cash Reserve Requirement (CRR). The CBN will hold that money and they will pay you zero interest. That CRR has increased over time

”I know if you take N10 million deposit, you don’t even have up to 40 percent available for lending. And you pay interest on the N10 million. It is the interest you make from that 40 percent that you use to service you’re N10 million deposit. It is also that interest that you use to pay the salaries of your workers. It is also that interest you use to buy generators to generate power to maintain those banks.

“Who are those suffering per say? The bank will always have a way of trying to make up. So the banks are charging higher interests and giving depositors lower interest because of that Cash Reserve Requirement.

“So you find banks lending money as much as 28 percent. But they pay depositors as little as 4/6 percent because of the CRR.

“The thing is that the CBN and the government, because they see the banks as where the money is, and have imposed so much tough environment for the banks to operate and the banks will always find a way to survive.

“Banks are facing a lot of challenges but nobody is talking about it. And it’s not all the banks that can afford to be alive, many banks are illiquid as we speak because of all these controls they’re putting in place. And nobody is talking about it. The banks are endangered specie.

“The main issue here is that the government wants to borrow money at zero cost from Nigerian people. That’s why the CBN rates are ridiculously low. And it’s deliberate.

“So it is the Nigerian people that are being made to suffer. Back in the days, in the 90s, banks were paying up to 21 percent on savings account, in this same economy”.

On his part chairman, Progressive Shareholders Association of Nigeria (PSAN), Boniface Okezie, noted that the banks are doing well because they are being run by good managers, stating that the problem of the larger economy is that those who are running it are not competent.

“If you put good managers in a place they will perform. So the banks are proving that”, Okezie told Business Hallmark.

“I don’t think it unethical practices that are making them do well, because there is a regulator. If they do that, there’s a regulator. The finance sector is the key sector driving the economy.

“And if they have done well there’s no how they won’t rake in money. And some of them that have failed to do the right thing are paying penalties as a result of contraventions. The CBN surcharges them”.