Turmoil on Broad Street

Nothing captures the parlous state of the Nigerian economy more than the gloomy atmosphere pervading the banking and financial sector. A few years ago, this sector used to be the crown jewel of the Nigerian economy, employing thousands of highly qualified white collar professionals and occupying the pride of place at the flagship of the Nigerian Stock market. But that was then. The situation now is strikingly different. Today the banking sector has become a shadow of its former self. The exuberant optimism that hallmarked the industry has been replaced by gloom and pessimism. Declining profitability, eroding capitalization, rising non performing loans, job losses, branch closures, falling stock prices etc are the new realities.

The sector has also lost its prime position as the main driver of volume in the capital market to about 19 per cent.

Some pundits trace the genesis of the current challenge to the implementation of the Treasury Single Account, TSA by the Federal Government, noting that the huge toll of that intervention has continued to impact negatively on the performance of banks.

“Single Treasury Account (TSA), tightening of foreign exchange transactions and other policies targeted at reducing banks’ non-interest income line are the beginning of the nightmare facing the operators now. Skye Bank Plc almost went down but for the apex bank’s intervention, while Diamond Bank on its part will be literally stripping its assets to shore upits finances. Many banks are increasingly borrowing, expanding the proportion of their equities financing to debt. Increasing demand for provisioning and eventual write off of bad debts may also greatly hurt some operators,” an expert, who preferred not to be named, said.

But the CBN Governor, Mr. Godwin Emefiele flatly rejects this position. He does not share the belief that TSA issue was posing any challenge or harming the banking industry.

Emefiele expressed discomfort that the banks could misinterpret a policy he (Emefiele) considers well thought for national interest.

“Coming here, the banks themselves have become my enemies because of the things I see that they do. Now, when these securities were available to banks, how did they use it to improve the lives of ordinary Nigerians? How much did they spend on agriculture, how much did they lend to SMEs? All they were interested in was taking these monies and lending them to Indians, Chinese and Lebanese to import goods that they produce in their countries, thus putting pressure on the foreign exchange,” he said

Analysts at a recent forum in Lagos also pointed at the effects of CBN’s periodic adjustment of the cash reserve ratio on public funds (CRR) was a child’s play compared with the trillions of Naira that have been withdrawn from banks’ coffers. This has already impacted on the industry’s average cost of funds and there is going to be a financing mix adjustment that is skewed to borrowing. While this is not bad for the sake of business, it however creates further obligations that may impact on the results unless the totality of the debt involved is fully and properly deployed.

“In the last two months, about N2 trillion has been mopped up from circulation. As the tightening continues, the cost of doing business would reach its heights while demand for credit in a recessive economy may slow down. All these will pressure banks and further postpone economic recovery”; analysts at the forum agreed.

According to Business Hallmark’s review, there are also some self-inflicted pains that are hurting banks’ profits. These include recorded massive exposure and the seeming neglect of retail banking operations that continue to make net performance to fall out of place. Analysts have however said that deep involvement in retail banking could reduce cost of funds and increase the banks’ ability to create more risk assets.

For the majority of listed deposit money banks (DMBs), their financial performance scorecard in the first half of the financial year 2016 reflects this sluggish economic undertone as average banks’ profits weakened as against the corresponding year’s numbers. The growth in the total assets of the systemically important banks in the period – of which loans and advances account for a significant chunk – did not however automatically translate to improved profitability.

Analysts are wary then that this trend that has already impacted negatively on banking stocks may continue throughout financial year 2016. With banks already groaning under heavy regulations, operating expenses in the industry also continue to move up even when banks are restraining themselves from lending. It has been observed that DMBs are on their own, already taking steps to raise additional capital, and hence strengthen their base financing.

Appreciating the dire situation in which many banks are in currently on account of increased regulatory pressure in the sector, some analysts have cautioned on the need to ensure that we do not in the process, muzzle the ox that threads the grain. They are also of the opinion that compared to their counterparts in other emerging economies as well as in Sub-Sahara Africa, Nigerian banks seems to be facing a tougher regulatory climate.

“While this is good on one hand, it is important for the CBN to soft pedal in order not to regulate banks out of the banking businesses”, Jide Famodun, Senior Consultant told Business Hallmark. ‘The atmosphere has become so tense that businesses are afraid of tomorrow. Having sensed this trend; banks have been very cautious to extend much needed support to credit demands,’ he added.

Timothy Adesina, Financial Consultant with SCP Professionals however feels on the contrary that the regulatory push will make the operators sit tight. He said the era of freebies has gone and that banks now have to work to improve their performances. He admitted that there may have been laxities in the apex bank’s regulations in the past, which enabled banks to make soft profits at the expense of the economy.

“You just have to look at the banking sector’s contributions to the overall economy specifically to the Gross Domestic Product, and compare this with the growth generated in the real sector of the economy. Banks offer services, Real Sector offers goods.

It is important now more than ever before to see commensurate growth in performance in both sectors.

Both Tier-1 and Tier-2 capital are courting additional financing sources. This is however mainly from the debt market as the equity market remains weak. Meanwhile, analysts are asking banks to be cautious as obligations on leveraged funds may have negative impact on year end performance. They attest to the fact that there are less than significant investing activities in the economy at the moment and that it is not enough to have capital in stock without demands.

To survive the times, some deposit money banks are already playing safe by investing more in the fixed income market. Some operators resort to this as demand for credit facilities decline. This may also be the operators’ last resort due to the current tightening in window facilities.

Some results from banks surveyed by Business hallmark recently, underscore the point being made.

Ecobank Transnational International (ETI) went down by as much as 32 percent on the back of weak contributions from Ecobank Nigeria. The group has continued to exercise restraint in the creation of fresh risk assets since 2015. ETI’s total assets grew by 28% to N5.916 trillion as against N4.609 trillion in the corresponding year 2015. This seems not to be an actual feat as the group’s total assets went down by 10% in dollar terms from $23.35 billion to $21.08 billion. Clearly, Balance Sheet conversion plays to the group’s advantage here again.

For its year end 2015 and the first half of the 2016, higher impairment charges took a toll on ETI’s earnings. The analysts, Afrinvest, say that the 2015 results reflected the Bank’s recent operational challenges as it booked a monumental impairment charge in loans and advances.

Being the cash cow within the group, Ecobank Nigeria’s contributions to the total tally witnessed a drag. This is attributed to overall declining economic performance within the country, in addition to increased regulation by the apex bank.

In 2015, the group’s impairment charge surged to N105.2 billion, which is 136.9% higher than the N44.4 billion it had booked in 2014. Unfortunately, the same pattern was also witnessed in the transnational financial hub’s first quarter 2016 result; thus significantly altering the earnings capacity of the Group.

Many analysts are not impressed by this result. In its review, Afrinvest was biting in its assessment. It stated that ETI’s financial year 2015 performance was quite disappointing though largely not unexpected given the earlier profit warning issued by the Group a few weeks before the result was released. Whilst the Bank achieved gross earnings growth, up by 10.9% to N542.7 billion as against N489.3 billion but down 8.0% in US dollar terms, the burden of higher impairment charges and sustained pressure on operating expenses weighed down profitability.

On its part, Zenith Bank Plc’s gross earnings declined by more than six percent from the N229.08 billion it recorded at the end of the first half in 2015 to N214.812 billion. At the same time, its profit before tax slipped to N63.28 billion from N72.2 billion in the corresponding year 2015.

The result came in as the bank expanded its risk assets as against ETI’s restraint on assets creation. By the end of first half in 2016, Zenith Bank Plc’s total loans and advances grew by 14.6 percent to N2.279 trillion from N1.989 trillion.

For First Bank of Nigeria Holdings, gross earnings went down the hill marginally, having lost 1.25 percent to N267.9 billion from the N271.3 billion that the holding company had reported in the corresponding period in 2015. Unfortunately, the group’s marginal decline in headline performance culminated to about 12 percent decline in its profitability.

At the end of first half 2016, FBNH’s pretax profit slipped to N45.9 billion from N52.1 billion a year earlier. At the balance sheet level, the bank’s loans portfolio grew by 16.59 percent from N1.817 trillion to N2.118 trillion at the end of first half 2016.

With headline performance generally crippled, it has been quite difficult for banks to cut back on their operating expenses. In recent times, some banks have embarked on downsizing with the aim of reducing personnel expenses.

This is understandable as looking through their books, it will be seen that personnel expenses account for the major chunk of their overall operating expenses.

“Cutting personnel is the easiest but laziest approach to reducing costs. For banks, it is the easiest option to managing cash flow. Sometimes, it provides immediate release of liquidity that can be deployed into operations. That’s why downsizing remains a most preferred cost-cutting tool in the banking sector,” Famodun remarked.

On the flip side however, both GTBank and Access bank Plc bucked the dismal industry trends as they achieved some level of surge with both earnings and risk assets growing significantly. For Access Bank, pretax profits jerked up by 27.89 percent just as its loans and advances to customers moved up at the same rate.

The bank’s pretax profit settled at N50.02 billion from N39.113 billion a year ago. Its loans and advances expanded similarly to N1.75 trillion from N1.365 trillion.

GTBank, the leading performer in the banking segment, achieved a 37.19 percent increase in top-line as its gross earnings jumped to N209.9 billion as against N153 billion in the corresponding year. Its pretax profit rose by 44.79 percent to N91.38 billion from N63.11 billion. At the balance sheet level, GTB grew loans and advances to customers by 13.77 percent from N1.373 trillion to N1.562 trillion.