By JULIUS ALAGBE
Amidst concern for economic recession which has generally clouded earnings outlook for 2020, banks are also struggling to meet the Central Bank regulations. Analysts have predicted earnings cut for 2020 as a large portion of the industry loans are expected to be restructured.
Apart from this, the Central Bank of Nigeria’s three time debit which has translated to more than N2 trillion is pressure cooker for earnings performance, analysts said. In the banking sector, due to inability to raise funding in the Eurobond market, lenders seems to have resorted to raising loans through International Finance Corporation’s Working Capital Solution Envelope.
According to IFC, WCS Envelope is designed to provide funding to its existing client banks in emerging markets that will then extend new trade-related or working capital loans to companies whose cash flows have been disrupted by the global outbreak of the corona virus pandemic. A number of Banks like Zenith, FCMB and others have accessed the credit line while Access Bank, FBNH among others have also made applications.
Analysts explained that lenders’ Q2 earnings may be threaten on account of three times debits for failing to meet the regulatory requirements regarding lending. The whole economic and regulatory scenarios are not presenting favourable condition for lenders balance sheet to expand, or for earnings to rev up in 2020.
Generally, analysts estimated that banks are expected to take sizeable revenues cuts in 2020 as against their 2020 guidance. It would be recalled at the first quarter 2020 earnings, Banks chief have explained that they may not be able to reflate performance.
The CBN is also adding pressure on funding, having debited banks three times in 2020 despite the pressure from economic inactivities. Forming a pattern, analysts said it appears that the CBN is deliberately locking out banks from making huge foreign exchange deposits.
Tellimer stated in an equity analysts report that the CBN is limiting banks’ abilities to bid for FX in the market as a way to keep Naira strong amidst dwindling foreign exchange reserves. Due to rampaging covid-19, banks earnings have been projected to slide in the second quarter of 2020.
Analysts explained that there are myriads of externalities plus regulatory demands that are expected to pressure earnings. Dividend payment would be affected as the need to plough back retain earnings would help banks to strengthen capital adequacy ratio.
At their separate conference call with analysts, some Banks indicate that due to development in the economy, their performance may fall short of their initial guidance. Booming with optimistic that economy would spike in 2020, Tier-I capital banks had set ambitious targets.
Speaking at earnings call with analysts recently, Nnamdi Okonkwo the Managing Director and Chief Executive Officer at Fidelity Bank Plc adjusted its projected profit metrics down by 15%. Trend like this would affect dividend payment among bulge balance sheet banks with combine total assets at N30 trillion.
Analysts said there is probability that Tier-2 capital banks’ earnings would drop significantly in 2020. Given the fact that there is already pressure in the sector due to increase in cash reserve ratio to 27.5%. In addition, loan to deposits ratio is pegged at 65% which gives operators tiny opportunity in other alternative investment windows to support their bottom line.
Unfortunately, more of the industry’s risk assets are now in the real sector of the economy that is not performing as earlier rated. Meanwhile, there have been expectations that Nigeria would automatically slip into recession after the pandemic.
On a flipside, experts recognise that the pressure on the economy would have been aggravated if the CBN initial initiative to push credit into the real sector was a day late. In addition, the government decision to stop importation has been largely position, plus initial ban on the 41-items by the apex bank to access foreign exchange.
Analysts said top banks like GTB, Zenith, Access, UBA and FBN have high exposure to oil and gas industry. Due to the high loans concentration in this segment, and the fact that the industry is facing massive prices reduction, operators’ loans may not perform. Average non-performing loans in the banking sector may shoot up to as high as 250 basis points, analysts stated.
In separate discussion at the Broad Street, analysts explained that banking sector NPL will rise due to pressure from retail, manufacturing and oil and gas clients’ accounts. Though, many banks maintained at their earnings calls with analysts the need not to be reckless with credit creations. Balancing the need to operate a quality balance sheets and booking 65% of their deposits as loans to the real sector is at the core of banking strategy at the moment.
Speaking about earnings outlook for Q2, Samuel Adeyeye, analyst at PAC Capital said it’s obvious that lenders non-interest income line, especially fee and commission income, will be adversely affected. He said few banks will have impressive non-interest income as we expect the FX revaluation gain to offset the setback in NII line.
Also, Damilare Asimiyu analyst at GTI Capital group said from all indication, Q2 earnings results of banks will come in disappointing.
“This is because Covid-19 disruption has negatively impacted all the major earnings sources of these institutions”. He further explained that for instance, from 2017-19, the good performance posted by most banks were driven by high earnings from trading activities.
This includes the open market operations (OMO), Treasury Bills (T-Bills) and bond investment due to attractive yields. Asimiyu however said this is no longer the case since the beginning of the year. He said based on available data, average Nigerian bank has 35% of its loan exposure to oil and gas sector.
“With the current low price of crude oil due to Covid-19 disruption, repaying those loans will be very difficult and banks’ balance sheet will feel the impact”, he said.
He stated further that some of the reforms made by CBN at the beginning of the year, such as reduced charges on online transaction and ATM charges will pressure the performance of these banks. Overall, Q2 earnings results of most bank will contract by an average of 8% compared to the corresponding period in 2019.