By JULIUS ALAGBE
Nigeria’s deposit money banks, which have been witnessing increasing regulation targeted at how they conduct their businesses in recent time, are presently groaning under the impact of an increasingly harsh operating environment, Business Hallmark checks have confirmed.
And even as they continue to brainstorm over how to hold their heads above water under the circumstances, analysts’ consensus is that the hot-pan regulatory environment would dilute their earnings in the financial year 2020.
At the core of the challenge is the perception that the banking sector has over the years continued to mint tons of profits at the expense of the real sector. It is this that has chiefly led to the current regulatory attitude in which the apex bank, in a bid to stimulate and jumpstart performance within the broader national economy has continued to raise the bar in the arena of regulation, and this is now translating into a gradual reduction of earnings sources for banks, analysts have noted.
Within the same or expanded prism, the analysts are also forecasting that this turn of events would also have a generally dampening effect on the bottom-lines and profitability quotient of many a banking sector player.
Tellimer for example is of the view that the Tier-I Banks growth would be unattractive in the year, though the emerging market focus investment firm maintains a neutral outlook on overall risk.
Overall, many analysts in airing their opinions on the tricky subject, state that, even the introduction of the policy of limiting banks placement to N2 billion on the Standing Deposit Facility window has already reduced one of the operators’ traditional sources of earnings.
Again, with the more recent cutbacks on charges on non-interest related banking services, it is more likely that banks’ profit performance would be strongly affected, starting from the first quarter of the financial year 2020.
“Many of the Central Bank of Nigeria’s directive would automatically ease lenders’ earnings capabilities, the result of which is expected to be visible in the first quarter of 2020”, analysts surmised at a Roundtable organised by MarketForces in Lagos, recently.
Taking this further, Tellimer suggests that some banks may already be showing high sensitivity to an expected down trend in the interest rates segment.
In its analysts note, the London-based emerging markets financial advisors states that a key downside risk for Nigeria’s banks would likely be non-interest revenue support from e-banking income.
The firm projects a non-interest income growth of 8% for Tier-1 banks and 15% for Tier-II operators as against median growth rate of 10% on global scale.
It also mentions anticipated growth from banks with ‘rest of Africa operations’ as it emphasises what it perceives to be the volatile Nigerian regulatory environment as a critical downside risk.
“Nigerian Banks scan well from a valuation perspective, however their growth prospects appear limited”, Tellimer affirms.
These conclusions are of course not just coming out of the blues. For example, the Central Bank of Nigeria has recently intensified moves to re-channel credits to the real sector of the economy. It started by enforcing a 60% loan to deposit ratio.
Adamant at sticking to the policy, at the end of the third quarter, and after it had sterilised about N500 billion from the cash positions of banks that had failed to meet the initial LDR requirement, the apex bank went ahead to raise the proportion of deposits that banks must lend to 65%.
This means that banks would need additional funds to shore up their capital base even as the percentage quotient of their deposits that should be extended to customers increased.
Also, the apex bank had cut their earnings from the Standing Deposit Facility through limiting all possible earnings to N2 billion.
In the same manner, the banks were excluded from participating along with their clients in the purchase of open market operation instruments.
And all of this is happening at the same time when yields on Treasury bills have been plummeting. Before then, many operators have in the past invested quite heavily in the fixed income market. By doing that, they had equally maintained a bearish stance on lending.
Analysts say that the seeming over-concentration of loans on select sectors, industries and markets was one of the critical fuels that had encouraged the CBN to come up with the LDR ratio directives.
In their reasoning, and as analysts also concurred, the private sector was being fund-starved even as banks were making more profits from the fixed interest market.
Analysts at Tellimer however say that the CBN move to stimulate economic growth by improving credit supply within the economy has potential negative implications on banks margin and assets quality.
Tellimer stressed further that the government’s recent decision to temporarily shut all land borders, reorganise the CBN’s Open Market Operations and introduce/raise taxes and levies could also result in near term pressure on consumers and companies.
“These also have knock-on implications for banks’ profits”, several other analysts have added.
Analysts state that with payment service bank licenses now issued, banks are expected to face stiff competition for retail, digital customers. This also includes transaction volume pressure.
Conclusively then Tellimer estimated an unattractive profit trajectory for Nigeria’s Tier-1 banks as well as likely and increasing credit risk.
It would be recalled that earlier in July, the CBN had announced a Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) at 60%.
In September, this LDR target was reviewed upwards from 60% to 65% and all DMBs were required to attain the minimum LDR of 65% by December 31, 2019.
Priority areas within the scheme include MSMEs, Retail, Mortgage and Consumer lending.
This upward review is following the 5.3% increase in credit to the private sector from N15.6 trillion in May to N16.4 trillion in September.
According to the CBN, failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall implied by the target LDR.
Making good its pledge, the CBN had debited N500bn from banks that failed to meet the 60% target in September.
“While this move is expected to further stimulate lending to key sectors of the economy, it could also result in a lower lending rate to businesses”, FSDH analysts said.
FSDH also note that forcing banks to lend to businesses, especially given the slow economic recovery has the potential to add pressures on banks, and therefore, raise non-performing loans in 2020 when some of these loans become due.
On the regulator’s unwavering stance, in its outlook for 2020, some other analysts that include Guy Czartoryski, Head Research at Coronation have posited that banks earnings may also suffer somewhat from CBN’s initiative to limit the scope of card charges.
Indeed the analysts at Coronation argue that this will likely be offset however “by balance sheet expansion and a degree of interest rate protection from high yielding securities”.
“Not all the CBN changes help banks make money. The recently announced reduction in card maintenance and fund transfer fees is a negative development. This is especially in view of positive trend in fee and commission income in recent year in banks books.
“Re-pricing deposits when loan rates are falling is difficult. Also, growing loans rapidly may open the way increase non-performing loan”, the analysts say.
And our final word: ‘Mr. Banker, fasten your seat belts!’