Four CBN ‘Big banks’ lose traction

By OKEY ONYENWEAKU

Four of Central Bank of Nigeria’s (CBN’s) designated systemically Important Banks (SIB’s) have begun to show signs of weakening operating advantage as rising loan defaults, falling capital adequacy and lower liquidity plague their balance sheets. Analysts note that these unfolding problems are tied to a volatile macro-economic environment; the four banks that seem to be under pressure are Skye Bank, Ecobank Transnational Incorporated, Diamond Bank and FBNH.

Even though the banks can be said to be technically safe and comfortable, they evidently seem to have survived a tough year in 2017, as strong economic headwinds almost knocked them off their pedestal. Skye Bank had its management replaced by CBN as a result of poor corporate governance issues, Ecobank had a few boardroom scuffles of its own which were eventually resolved, while Diamond bank had to cope with bank loans that were increasingly becoming delinquent. FBNH had loan troubles of its own which seem to be on the mend as the economy picks up and oil price recovery improves the fortunes of oil companies that were significant borrowers.

The economy which emerged from a deep recession in 2016 to grow by 1.4 per cent in the third quarter 2017 with projections of 2.8 per cent in 2018 has raised speculations concerning sustainability. Economist who spoke this newspaper noted that the health of the economy reflects the health of its various sectors; the financial sector has shown signs of relative good health, compared to the manufacturing and service sectors. In fact, the Central Bank of Nigeria has consistently re affirmed the soundness and good health of the country’s deposit money institutions (DMB’s).

However, there have been mild concerns that all may not be well with the banking industry, given the depressed macro and micro-economic environments that persisted from the first quarter of 2016 to the second quarter of 2017.

Analysts note that from issues of declining crude oil prices, forex crisis, illiquidity, mounting non-performing loans (NPL), Treasury Single Account (TSA), local money institutions had had it up to their necks in operating trouble. These challenges culminated in a slow economy, low profit margins and low capital adequacy ratios. Although these hiccups appear to be easing, that economic growth has remained feeble.

More recently, financial regulators have been concerned about banks categorised as ‘Too Big to Fail’. A few years ago, the CBN identified First Bank of Nigeria Plc, United Bank for Africa Plc, Zenith Bank Plc, Access Bank Plc, Ecobank Nigeria Plc, Guaranty Trust Bank Plc, Skye Bank Plc, and Diamond Bank Plc as systemically important banks.

These banks, the financial regulator pointed out could have severe consequences for the money market if anyone of them failed.

The “too big to fail” theory, according to bank experts, suggest that certain corporations, and particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and that they therefore must be supported by government when they face potential failure.

The colloquial term “too big to fail” they also noted was popularized by U.S. Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the Federal Deposit Insurance Corporation’s intervention with Continental Illinois.

The regulator also structured a strategy of supervising the eight systemically important banks in order to stem, control and stop a financial system failure.

The CBN had in 2016 said eight of Domestic Systemically Important Banks (D-SIBs) accounted for N11.76 trillion (72.2per cent) of the aggregate industry loans of N16.29 trillion.

CBN in its financial stability report that was released then revealed that eight banks earlier designated as SIBs retained their status during the period under review.

However,  “These banks were required to meet more stringent prudential regulations to reflect their systemic importance.

“At end-December 2016, the D-SIBs accounted for N20.87 trillion (69.06per cent) of industry total assets of N30.22 trillion.

“Similarly, the D-SIBs accounted for N13.04 trillion (70.25per cent) of total industry deposits of N18.56 trillion and N11.76 trillion (72.2per cent) of the aggregate industry loans of N16.29 trillion, said the report.

The banks, especially in the third quarter of 2017 show a mixed performance. For instance;

While it not easy to know what is happening in Skye Bank since its books are no longer made public, the CBN sacked and replaced some key members of its Board of Directors and management team, saying its findings revealed that the bank had fallen short of the minimum thresholds in critical prudential and capital adequacy ratios.

The chairman, managing director, deputy managing director, all non-executive directors and the two longest-serving executive directors on the board and management team of Skye Bank were replaced by the central bank.

“proactive moves have become unavoidable in view of the persistent failure of Skye Bank to meet minimum thresholds in critical prudential and adequacy ratios, which has culminated in the bank’s permanent presence at the CBN lending window.” CBN had said.

Godwin Emefiele, CBN Governor, had noted that, “the most important issues in banks are non-performing loans, capital adequacy ratio and liquidity. What we have seen since late 2014 to 2016 is that the prudential and adequacy ratio of Skye Bank has been weakening.

“We thought it was not right for us to allow this to continue to the point that it gets irreversible. That is why we took this action to nip it in the bud. It has nothing to do with being in distress. We do not want the liquidity and adequacy ratio of the bank to worsen to the point that depositors’ funds get into risk. The board itself has come to the realisation that they have done their best and it is about the time that they bowed out so that a new team can come in to run the bank in order to improve its position.

“Naturally, what you have seen is that by the time the capital is recomputed and revalued, there is a sort of weakening in value, but it has not eroded the capitalisation and value of the bank. We are hoping that as the new team comes up, the value will definitely improve.” This analysts say removes Skye Bank from the group of systemically important banks.

Ecobank Transnational Incorporation (ETI) Plc’s in the third quarter saw its earnings surge despite an uncertain environment as the lender achieved a successful placement of a $400 million convertible debt. The Pan African bank’s net income increased by 12.15 percent to N57.95 billion from N51.57 billion the previous period of 2016.

However, its ratio’s appear stable, especially the capital adequacy ratio which stood at 23.7 per cent, 8 .7 per cent above the regulatory benchmark of 15 per cent. The bank’s Non-performing loans stood at above the regulatory benchmark of 5 per cent.

DIAMOND Bank Plc recorded remarkable increase in profit, as profit before tax surged by 71 percent to N6.7 billion in the third quarter 2017.

Its gross earnings in the third quarter 2017 jumped by 11 percent year-on-year to N168.4 billion while profit before tax surged by 71 percent to N6.7 billion from N3.89 billion recorded in the third quarter of 2016.

Impairment charges came under control and shrunk by 16 percent to N35.3 billion year-on-year.

While operating costs rose by 16 percent to N54.3 billion from N46.7 billion in the corresponding period last year. The bank attributed the increase to the huge investment in technology acquisition to boost the management’s strategic plans  and set goals. The bank’s liquidity ratio stood at 32.7 per cent while capital adequacy ratio was at 15.8%. The non-performing loans also stood at 9.5 per cent as total assets closed the third quarter at N2 trillion.

FBN Holdings has demonstrated its resilience in revenue generation with a 5.2% y-o-y growth in gross earnings to N439.2 billion following a y-o-y increase of 25.2% in net interest income to N254.3 billion. The Group, according to the management, is progressing in building the right structures for sustainable growth through an improved credit culture and risk management; increased technologically driven operational efficiencies; and the introduction of revenue enhancing platforms.

A confident bank which is working effortlessly to remedy its books given the set back the oil and gas suffered between 2014 to date. First Bank strongly maintains one the highest liquidity ratio’s in the banking industry at of 47.4 per cent, 17 per cent above regulatory benchmark of 30 per cent.

However, some of the strong banks including Zenith Bank, G t Bank, Access Bank and UBA have proved to be resilience over the years.

Zenith Bank, the largest Bank in Nigeria by total asset, recorded a group PBT of N152.552 billion for the third quarter ended September 30, 2017 as against N116.587 billion in the corresponding period of 2016. Also, gross earnings stood at N531.226 billion as against N380.352 billion in the corresponding period of 2016. The bank has maintained a strong and stable disposition.

With total assets of N5.131trillion and profit after tax growth by 30.8 per cent, Zenith Bank has solidly maintained a strong ranking in the banking industry in Nigeria. This is reflected in strong liquidity ratio, standing at 61.10 percent, 31 per cent above the regulatory benchmark of 30 per cent.

Similarly, the lenders Capital Adequacy Ratio stood at 22.20 per cent, 12.20 per cent above the regulatory benchmark of 15 per cent. Business Hallmarks research also revealed that Zenith Bank was able to manage its non-performing loans and kept it as low as 4.20 a little lower than the permissible regulatory bench mark of 5 per cent.

GT Bank Plc another strong bank and arguably a model of a well run financial institution in Nigeria given the three times Harvard Business School researched on the institution. It recorded PBT of N150.03 billion for Q3 ended September 30, 2017, representing a growth of nine per cent over N137.99 billion recorded in the corresponding period of September 2016. The bank explained that the increase in PBT was primarily from 36 per cent growth in interest income.

GT Bank’s performance in the third quarter 2017 show positive growth in major financial metrics and improved strategic positioning of the brand. The bank recorded a Total Assets of N3.213trillion and Shareholders’ Funds of N581.91billion in the third quarter 2017.

Its loan book contracted by 10 per cent from N1.590trillion recorded in December 2016 to N1.428trillion in September 2017 due to conscious effort to de-risk the balance sheet and unwinding (pay-down) of trade obligations. A strong lender liquidity ratio of 49.75 per cent, 19.75 per cent above the liquidity bench mark of 30 per cent. GT Bank’s capital adequacy ratio (CAR) of 22.90 per cent, 7.9 per cent above regulatory benchmark 15 per cent was robust.

Access Bank Plc, one of the largest Deposit money banks in Nigeria recorded a 33 per cent growth in gross earnings at N365 billion in the third quarter 2017 up from N275 billion in the corresponding period of 2016.

It’s growth in earnings , according to Access bank  was driven primarily by the strong performance on key revenue lines.

Access Bank Group delivered 5.7 per cent increase in pre-tax profits to 72.9 billion in September 2017, from 69.0 billion in September 2016.  The Bank was able to show efficiency in cost management as operating costs reduced significantly by 18 per cent quarter-on-quarter to 49.5billion in September.

Its strength is also embedded in the ability to bring down its non-performing loans to 2.5 per cent, far below the regulatory bench mark of 5 per cent and the average banking sector non-performing loans of 13 per cent  as at last year. With a liquidity ratio of 46.0  per cent against the benchmark of 30 per cent, Access Bank is solidly stable. The bank which just rolled out a five year strategic plans to pursue a more robust banking with enhanced technology, has maintains a capital adequacy ratio of 20.5 per cent.

United Bank for Africa (UBA) declared N60.92 billion post-tax profit and a gross revenue of N333.91 billion in Q3 2017.

Coming on the heels of its impressive performance in the Q3, UBA is poised to end the year with a boisterous balance sheet.

United Bank for Africa (UBA) has grown its third quarter (Q3) 2017 profit by 33.2 per cent, one of the strongest year-on-year earnings growth rate amongst first tier deposit money banks (DMB’s) in Nigeria.

UBA also pushed up its gross earnings by 25% from N265.5billion in Q3 2016 to N333.9billion in Q3 2017. The banks fees and commissions rose slightly from N56.215billion in 2016 to N57.885billion in the contemporary period of 2017, while its operating income leapt 29% from N183.2 billion to N236.9billion. Surprisingly the bank saw its electronic banking revenue slump 37 per cent dropping from N24.804billion in Q3 2016 to N15.605billion in the contemporary period of 2017.

The banks total assets inched up from N3.5trillion in 2016 to N3.7trillion in 2017. Its total operating expenses rose by 26% from N115.2billion the previous year to N145.6billion in 2017.  Total deposits rose by 1.3% from N2.485billion in 2016 to N2.519billion in 2017.

Analysts believe that the eight banks are still strong to be categorised as’ too big to fail’. Managing Director of High Cap Securities, Mr. David Adonri reckons that Fidelity bank should be added in the category while Skye Bank be dropped. Whereas the perception of industry watchers are that the banking industry has weakened, the spokes persons of these banks did not respond to Business Hallmark’s text messages and calls before press time.

The Operating environment in 2018

There appears to be bright prospects for the economy in 2018. Economists believe that with 2018 being a pre-election year the government would be under severe pressure to reflate the economy and generate demand needed to expand the real sector and create jobs.  With a staggering local unemployment rate of 36 per cent between the ages of 18 and 34, the unemployment question will be a major campaign issue in 2019.

There is strong belief that fiscal and monetary policies of the federal government will be expansionary in the New Year as the government struggles to push the economy ahead faster. Of course, those who want to win election will pretend to have the masses at heart and loosen the tight policies to provide liquidity. In this light, President Muhammadu Buhari has already presented a budget of N8.6trillion for 2018.

The Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele may  also temper down monetary policy rate (MPR) from 14 per cent to affect  lending rate which hovers between 20 to 25 per cent in the banking industry. This will prompt higher earnings for companies and attract investors to invest in the market. Analysts note that it may not be out of place to see investors drifting from money market securities to the stock market. More so, interest rates for deposit savings accounts are still very low at 3 to 4 per cent while coupon rates have declined to about 14 per cent. Many market observers agree that this may have been caused by the Federal Governments shift to borrow from the international market and not crowd out the private sector.

A few weeks ago, the Minister of Finance, Mrs Kemi Adeosun released N750billion capital expenditure, the price of crude still hovers reasonably at $62 and $66 per barrel and there is relative calm in the Niger Delta. These many believe will provide liquidity to players in the money and capital market and this will be favourable to the banks.