Business
COT removal to worsen bank’s performance in 2016
JULIUS ALAGBE| The planned removal of commission on turnover (CoT) by the Central bank of Nigeria, CBN, in 2016 will reduce transaction cost for the real sector operators but may see many banks looking for other means of shoring up their bottom-line.
CoT is the expense incurred by customers of banks for their business transactions and payments. It is calculated at one naira to a thousand.
Unknown to most customers every transaction in the bank attracts some administrative and handling charges.
The cost of operation in the real sector will however be lower compare to the previous years as transaction cost will be reduce albeit marginally.
However, the effect of reduction in cost of borrowing derived from a two per cent downward adjustment of the Monetary Policy Rate, MPR, by the CBN in October, would be added value expected to be enjoyed, by borrowers from 2016.
According to banking sector profitability performance for the year, non-interest income contributed massively to the feat achieved so far in the year as some DMBs develop cold feet on building risk assets.
It may be recalled that the apex bank released a circular informing banks to completely remove CoT charges for transactions to be conducted by individuals and corporate clients by January 2016.
Thus banks are no longer expected to charge Commission on Turnover following the gradual phase out that commenced in financial year 2013.
Up to the moment, some banks still engaged in the usual practice of overcharging their customers’ accounts.
CoT is the expense incurred by customers of banks for their business transactions and payments. It is calculated at one naira to a thousand.
Unknown to most customers every transaction in the bank attracts some administrative and handling charges.
The cost of operation in the real sector will however be lower compare to the previous years as transaction cost will be reduce albeit marginally.
However, the effect of reduction in cost of borrowing derived from a two per cent downward adjustment of the Monetary Policy Rate, MPR, by the CBN in October, would be added value expected to be enjoyed, by borrowers from 2016.
According to banking sector profitability performance for the year, non-interest income contributed massively to the feat achieved so far in the year as some DMBs develop cold feet on building risk assets.
It may be recalled that the apex bank released a circular informing banks to completely remove CoT charges for transactions to be conducted by individuals and corporate clients by January 2016.
Thus banks are no longer expected to charge Commission on Turnover following the gradual phase out that commenced in financial year 2013.
Up to the moment, some banks still engaged in the usual practice of overcharging their customers’ accounts.
Analysts said that unknown to some banks customers CoT is negotiable on transaction based on the provisions of the CBN guide.
Section 3.1 of the Guide provides that CoT is negotiable subject to a maximum of N3 per mille in 2013; N2 per mile in 2014; N1 per mile in 2015; and that no CoT would be charged starting from the financial year 2016.
As such, customers are not expected to pay more than N1 per mille, which translate to paying N1 on every N1000.
According to analysts, banks will have to increase efforts to remain profitable and lend more to viable sectors of the economy to achieve their profitability targets.
Some banks customers that spoke to BusinessHallmark asserted that some of the accounts they operate have zero CoT.
Bank customers that were interviewed said that some of the financial service operators, especially Tier 11 capital banks in their quest to build retail segment used zero CoT account to draw customers’ attention.
There have been complaints that some banks continued to charge above the N1 per N1, 000 in 2015 as against CBN requirement.
In 2014, more than 30 per cent of non-interest income that accrued to Zenith Bank Plc was from COT charges while it accounts for 17.8 per cent of non-interest income reported by Guaranty Trust Bank Plc in 2014
followed by Fidelity Bank Plc at 15.4 per cent.
Meanwhile, due to the anticipated commission removal, analysts said that the banking sector profitability may be affected.
They say that some banks increased activities to garner commission and fees in order to boost result in 2015 and since CoT in the line item of non-interest income will be removed, the banks performances are expected to nosedive to the tune.
In their separate nine months unaudited financial statement made available to the Nigeria Stock Exchange in 2015, some banks performance leap were helped by improvement recorded in non-interest income.
However, interest income from some banks interest earnings assets were low as result of decline in lending business activities.
Currently, some financial and investment banking experts are expressing worry over banks’ seemingly excessive exposure to power, oil and gas in their portfolio of earnings assets.
The bandwagon effect often associated with booming period had
pushed up banks’ aggregate loans and advances to finance power, oil and gas projects in the past.
However, reality has hit on the heel of plunging prices of oil while power companies are struggling with profit targets as a result low power generation.
CardinalStone Partner noted that changing dynamics in petroleum and power sector will push up banks’ non-performing loans, and consequently, hike loan loss provision in 2015.
The investment banking firm in a report said that this is based on decision of the current administration’s determination to eliminate the inefficiencies in the current fuel subsidy regime by either removing subsidies or plugging the sources of the leaks.
“We therefore expect a deterioration in the percentage and quality of loans to the O&G sector of the economy and a consequent increase in NPLs and provisioning in H2’15.
With an average 26.6% of gross loans to the upstream and midstream sectors of the economy as at FY’14 we expect an increase in provisioning across all the banks under our cover
age,”CardinalStone stated.
CardinalStone partner estimated that FBNH, SKYEBANK, and STERLING BANK will be worst affected as they have highest percentage of loans to the Oil & Gas sector of the economy.
“We however note that many of the banks under our coverage have indicated that oil prices will have to fall below $35-$45 before there are loan defaults in the upstream sector, while some banks, FBNH for example, stated that they have already re-structured loans since the crude oil price crash”, CapitalStone Partner noted.
A financial expert who prefers not to be mentioned said that banks have ways of doing their businesses.
“You will be surprise how the year end result will turnout.
Sometimes it beats Broadstreet analysts’ imagination to see good result for a particular quarter or year given the economic interplay in the period.
That’s why we are financial experts, we know our onion”, he said.
Financial experts at SCP Professionals also agreed that banks are no dumb bunny not to know they are
in business of making money.
“Banks have seemingly unlimited capability to a certain extent to make things happen in the economy except they chose to do otherwise,” they said.
The data provided by CardinalStone Partner research show that FBNH has 64.4 per cent exposure to sectors that have highest risk of default namely oil and gas, manufacturing and consumer credit followed by GTB and Stanbic IBTC with 56 percent each.
FCMB’s loan to high risk sector was calculated to be 51.4% while UBA Plc record was 46.2%.
Section 3.1 of the Guide provides that CoT is negotiable subject to a maximum of N3 per mille in 2013; N2 per mile in 2014; N1 per mile in 2015; and that no CoT would be charged starting from the financial year 2016.
As such, customers are not expected to pay more than N1 per mille, which translate to paying N1 on every N1000.
According to analysts, banks will have to increase efforts to remain profitable and lend more to viable sectors of the economy to achieve their profitability targets.
Some banks customers that spoke to BusinessHallmark asserted that some of the accounts they operate have zero CoT.
Bank customers that were interviewed said that some of the financial service operators, especially Tier 11 capital banks in their quest to build retail segment used zero CoT account to draw customers’ attention.
There have been complaints that some banks continued to charge above the N1 per N1, 000 in 2015 as against CBN requirement.
In 2014, more than 30 per cent of non-interest income that accrued to Zenith Bank Plc was from COT charges while it accounts for 17.8 per cent of non-interest income reported by Guaranty Trust Bank Plc in 2014
followed by Fidelity Bank Plc at 15.4 per cent.
Meanwhile, due to the anticipated commission removal, analysts said that the banking sector profitability may be affected.
They say that some banks increased activities to garner commission and fees in order to boost result in 2015 and since CoT in the line item of non-interest income will be removed, the banks performances are expected to nosedive to the tune.
In their separate nine months unaudited financial statement made available to the Nigeria Stock Exchange in 2015, some banks performance leap were helped by improvement recorded in non-interest income.
However, interest income from some banks interest earnings assets were low as result of decline in lending business activities.
Currently, some financial and investment banking experts are expressing worry over banks’ seemingly excessive exposure to power, oil and gas in their portfolio of earnings assets.
The bandwagon effect often associated with booming period had
pushed up banks’ aggregate loans and advances to finance power, oil and gas projects in the past.
However, reality has hit on the heel of plunging prices of oil while power companies are struggling with profit targets as a result low power generation.
CardinalStone Partner noted that changing dynamics in petroleum and power sector will push up banks’ non-performing loans, and consequently, hike loan loss provision in 2015.
The investment banking firm in a report said that this is based on decision of the current administration’s determination to eliminate the inefficiencies in the current fuel subsidy regime by either removing subsidies or plugging the sources of the leaks.
“We therefore expect a deterioration in the percentage and quality of loans to the O&G sector of the economy and a consequent increase in NPLs and provisioning in H2’15.
With an average 26.6% of gross loans to the upstream and midstream sectors of the economy as at FY’14 we expect an increase in provisioning across all the banks under our cover
age,”CardinalStone stated.
CardinalStone partner estimated that FBNH, SKYEBANK, and STERLING BANK will be worst affected as they have highest percentage of loans to the Oil & Gas sector of the economy.
“We however note that many of the banks under our coverage have indicated that oil prices will have to fall below $35-$45 before there are loan defaults in the upstream sector, while some banks, FBNH for example, stated that they have already re-structured loans since the crude oil price crash”, CapitalStone Partner noted.
A financial expert who prefers not to be mentioned said that banks have ways of doing their businesses.
“You will be surprise how the year end result will turnout.
Sometimes it beats Broadstreet analysts’ imagination to see good result for a particular quarter or year given the economic interplay in the period.
That’s why we are financial experts, we know our onion”, he said.
Financial experts at SCP Professionals also agreed that banks are no dumb bunny not to know they are
in business of making money.
“Banks have seemingly unlimited capability to a certain extent to make things happen in the economy except they chose to do otherwise,” they said.
The data provided by CardinalStone Partner research show that FBNH has 64.4 per cent exposure to sectors that have highest risk of default namely oil and gas, manufacturing and consumer credit followed by GTB and Stanbic IBTC with 56 percent each.
FCMB’s loan to high risk sector was calculated to be 51.4% while UBA Plc record was 46.2%.
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