Previous expectations that Nigerian banks would become stronger and perform their critical role of financial intermediation have further dimmed as they are instead faced with a myriad of challenges that appear to be impeding the ability of the financial Institutions to live up to this billing.

Related to this is the fact that, in a subtle way, this development tends to put a dampener on government’s effort to create the necessary enabling environment for business players and also applying far reaching measures to boost confidence in the economy. The challenges have also now been further heightened by the unannounced ravaging effect of the Corona Virus pandemic.

Speaking to the issue, a former managing director of one the big banks in the country told Business Hallmark (BH) that though Nigerian banks are much stronger now overall, but the year 2020 may not look as good as the previous year in terms of performance.

BH research shows that deep uncertainty still pervades the banking industry over the expected and anticipated impact and effect of the pandemic and the associated low price of crude oil on their balance sheet.

On the other hand, banks themselves have become more interested in exploring a surfeit of survival strategies (given the tough operating environment).

Accordingly, there is a mixture of fear and expectation that has pervaded the boardrooms of banks as they keep reviewing their forecasts in the light of shifting and adjusting field realities.

An insider in the financial institutions system told BH that banks are keenly watching the unfolding scenario while trying to articulate plans to weather the storms of Covid-19 and the drop in the price of oil which hovers between $40 and $48 per barrel, and that has clearly worsened the already bad situation

This has equally raised fresh concerns that the year 2020 may not be so favourable to Deposit Money Banks (DMB’s) in terms of their earnings performance and dividend payout.

While analysts and other market mavens seem to be predicting a relatively weaker financial performance for the banks in 2020 compared with the previous year 2019, Hallmark Economic Intelligence Unit projections indicate that both earnings and dividend payouts are likely to grow but at a slower pace this year.

However, many industry analysts have blamed the weak earnings situation on not only the weak economy, but also the tempo of low business activities caused by the lockdown which almost halted businesses for about five weeks. Nevertheless, some banks have already released fairly strong results for the second quarter ended June 30, 2020. But the field is clearly uneven.

On its part, the Nigerian lender, Unity Bank is not immune to the vagaries of the times and its management has presently moved to alert its base of what it is seeing ahead of it.

According to reports emerging from its corporate suites, the bank which had posted a seven per cent increase in profit before tax in half-year (H1) 2020, is currently projecting a huge loss of about N2billion in the approach to Q4 2020.

According to the forecast which was recently turned in to the Nigerian Stock Exchange (NSE), the bank expects to post gross earnings of N4.975billion and a loss after tax of N1.800billion

The forecast document also revealed that its expected interest expense would now stand at N3.821billion as against the interest income of N3.359billion that had been expected in Q4.

And while impairment for credit loss is expected to close negative at – (N829million), operating expenses is expected to be N1.984billion.

Despite the gloomy expectations which may have been prompted by the ravaging effect of the Coronavirus pandemic that had forced a complete lockdown for five weeks both in Nigeria and other countries of the world, questions are however still being asked as to why Unity Bank is forecasting such huge losses in Q4 of the year? This is more so as economic activities have presently begun to open out all across the country.

The overly bearish trend is already affecting some of the bigger banks in the system, whose results, though not very weak, are however still showing signs of weakness. For instance, GT Bank, Access Bank and UBA posted profit decline in the half year results ended June 2020. These banks are now so jittery that the end of year may not be too good for them.

Details show that Access Bank Plc which came third in the ranking of banks with the highest profits in H1 2020 recorded a decline in profit year on year amidst lower economic activities. The lender recorded a profit after tax of N61.034 billion, representing a marginal decline of 1.4% when compared with N61.874 billion in the first half of 2019.

GTBank’s after tax profit actually declined in absolute terms. The lender’s profit after tax printed at N94.231 billion in the first half of 2020, representing a 5% year on year decline when compared with the N98.916 billion reported in the comparable virus-free earnings season in 2019.

United Bank for Africa also reported year on year decline in profitability in the first half of 2020. UBA’s profit declined 21.6% year on year to N44.431 billion in the first half of 2020 as against the N56.739 billion reported in the comparable period in 2019.

This is indeed the lot of many other banks. However, not all of them will forecast or go on to post outright losses but there are compelling reasons to believe that they may review downward their earlier forecast given the prevailing volatile operating environment.

There is also a consensus that, given the current scenario, the core economic dynamics in the sector have not only been altered but that the developments signal an uncertain future.

Analysts believe it has become hard for firms to fly in such weak economies as Nigeria where the economy which has already shrunk by -6.1 per cent in the second quarter of 2020 is expected to slide into recession shortly; where inflation is hitting the roof at about 13 per cent; where the Naira has lost value and vigour; where the budget deficit stands at -4.69% of GDP; where insecurity has halted business activities in some parts of Northern Nigeria; where unemployment remains very high; where the government is unstable with about N31trn debt stock hanging on its neck; and where economic policies are allegedly being carried out to favour a section of the country.

Equally debilitating is the fact that real incomes have shrunk massively and many people are only now struggling to eat. In such harsh environment, not even the CBN’s ostensibly quite generous recent reduction in the MPR from 12.5% to 11.5% can pull any magic of guaranteeing a better survival rate for many. The expected positive impact of stimulating the economy may also not fully achieve its intended objective given the impeding effect of Covid-19. As a result, banks have gone back to the drawing board to review their forecasts based on the prevailing circumstances in the economy and the broader operating environment.

In such situations, the measurement indices that are most affected experts say are usually the top lines and bottom lines.

The banks are not exceptions as investors are already beginning to expect lower yields and returns in terms of dividends and other benefits.

Analysts have pointed out that one of the factors that banks have to contend with during economic recession is the general slowdown of business which in turn leads to income/profit decline. The likely remedy they said is for banks to dimension the economy for emerging opportunities.

They further stated that the impact of recession on the Nigerian banking system generally would make banks highly vulnerable to economic recession, financial crisis and mortgage crisis.

This looming circumstance and uncertainty brings to mind the scenario of 2016 when the economy slipped into recession for 12 months and most Deposit Money Banks posted lower profit margins.

There is also a consensus that the world economy is in deep trouble. For instance, over 30 firms have closed shop in the USA which is even a stronger economy. Europe is no better. Businesses in the United Kingdom and many other parts of the world have also had their fair share of upheavals which has resulted in the closure of many firms. Therefore, Nigerian banks would clearly not be an exception.

Commenting on the issue, Managing Director of HighCap Securities Limited, Mr. David Adonri, told BH that in his view, the downward revision of Unity bank’s numbers as shown in its forecast in which it had disclosed that it expects a huge loss in its Q4 2020 operating numbers was well informed and realistic.

Adonri noted that investments in the fixed income market, especially in government bonds which used to earn banks as much as 18 per yield and accordingly help strengthen their balance sheet has crashed to about 3 per cent; the economy is sliding into stagflation at the close of the third quarter which is very bad for the banks, and the forex market is also not favourable to the financial institutions presently. ‘’

These developments, Adonri said, ‘show that the down factors out-weigh the upside factors. So the management of the bank is very clear about what it is doing’’.

For the Managing Director of BIC Consultancy Limited, Dr. Boniface Chizea any company that is able to post profit in this era of Covid-19 in which business activities are very low due to lockdowns, among other challenges should be grateful.

“Don’t you think the banks should be thankful that they are making profit at all? We are in a situation where most businesses are struggling to keep their head above water. The banks, whatever, are still able to make profit. Of course, somehow, they will be seeking regulatory support. Otherwise any business that is still operating and is able to pay salaries should be thankful. This is an unprecedented season,” he expressed.

In his view, Managing Director, Cowry Asset Management limited, Mr. Johnson Chukwu told BH that it was normal for profit margins to drop given that the level of business activity is very low and even lower than last year.

He reckoned that some big banks may use size to weather the storm but explained:

’’ On the average, the banking industry should have a decline in profit margins. You know that in some part of this year there was no business; and in the third quarter which just ended last week, businesses are just picking up and those businesses go through banks. Today there is also forex limitation. So, all of these will affect businesses.’’

To put a lid on all of the arguments, it is quite clear how the current reasoning flows. The level of business activity is low this year, even lower than what it was last year. Though there are some banks like Zenith and GT Banks for example where we may see an increase in their profit lines and who will not decline, the fact that there are a few banks like these that will see some increase in their profit lines because of their size would however not be an industry norm. You know that there is a sense in which banking is about size, or to put it in other words, that size helps. This is for the reason that if you have increased your size beyond what it was last year and then even had a suppressed profit margin as part of the fall-out, that increase in size may now off-set that reduction in margin.

On the average then, the Nigerian banking industry should have a decline in profit margins. You know that in some part of this year there was no business; and in the third quarter which just ended last week businesses are just picking up and those businesses go through banks. Today there is forex limitation. So, all these will affect businesses.

Given the vagaries of the economic environment, there are strong indications that banks may not achieve their targets, in terms of their initial forecasts even as there are also strong indications that many of the banks are currently reviewing their earlier targets with a view to coming out clean on this with the investing public. Fair is fair.