FX deals boost banks profitability

.           Transactions make up for business slump

Teslim Shitta-Bey

Nigerian banks showed relatively mixed corporate performances in 2016 as dodgy economic management, sliding international oil prices and rising domestic inflation conspired to iron down profits. Corporate profits for the four top banks (GT Bank, Zenith Bank, Access Bank and UBA) grew by an average of 28.6 per cent between 2015 and 2016. Gross earnings of the four leaders equally edged higher at a sleek average of 20 per cent over the period. Regardless of the apparent difficulties of the economy in the year both first and second tier banks were able to hold up operating profits but only as an aftermath to clever financial footwork in the foreign exchange market with a bank like GT Bank raising its foreign exchange valuation gains by a staggering 1,023.7 per cent or ten times the previous year figure rising from N8.5billion in 2015 to N95.6billion in 2016. The trend was similar for other first tier banks.

The sectors chief adversary in 2016 was a growth in impairments that reflected the worsening conditions of the real sector of the economy that had suffered major damage from foreign exchange-induced rise in direct production costs and a growing scarcity of foreign exchange to open letters of credit (L/C’s) for the import of critical raw material.  According to Mayokun Aderibigbe, a medium scale manufacturer and chief executive officer of Mayde Industries a local industrial adhesives maker, ‘to say that we saw red last year would be underwhelming. We saw black, blue, red and every other colour in between. How we survived the year I still can’t explain, but what I do know is that our bank balances are still not tidy’, he laments.

When bad loans make for poor profits

The difficulties of manufacturers and traders in 2016 played up in the loan books of virtually all the money centre banks as hefty provisions had to be made in the course of the year for bad and doubtful debts. GT Bank, for example, peered at its loan impairment figure rise from a fairly modest N12.4 billion in 2015 to a whopping N65.3 billion in 2015 representing a fivefold increase in debt charges.  In lockstep Zenith bank equally had to taste the bitter bile of rising impairment data.  The bank’s loan impairment provision rose from N15.7 billion in 2015 to N 32.4 billion in 2016, a leap of 106.3 per cent. UBA another tier 1 competitor saw impairment charges grow by a stunning 448 per cent from N5 billion in 2015 to N27.7 billion in 2016, a seismic fivefold blast. Access Bank, the last of the four bank oligarchy responsible for over 60 per cent of Nigeria’s loan asset creation, also saw its asset book tainted by hardcore non performing credits resulting in a 54 per cent rise in impairment charges from N 14.2 billion in 2015 to N21.9billion in 2016.Ironically this represents the best impairment data out of the four leading banks.

The debt repayment problem for the banks reflects a combination of poor economy and poor judgment. The local economy took a severe dive in 2016 sliding from a contraction of 0.36 per cent in the first quarter to 2.06 per cent by the second quarter, confirming Nigeria’s first recession since 1991. Matters were made worse by the third quarter as the economy shrunk further by 2.24 per cent and tailed off the year with a negative growth of 1.3 per cent. The full year contraction for 2016 was 1.5 per cent. This made for a very difficult year as slowing economic activity was made worse by rising inflation. Inflation rate which was about 9 per cent in the first quarter of 2015 had spiraled to a chilling 19 per cent by the end of 2016, leaving savers worse off last year than they had been at any other time in the nation’s recent history.

Dr Alex Otti, former Managing Director, Diamond Bank Plc in a recent interview with Business Hallmark pointed out that, ‘the economy got squeezed into an ugly box called stagflation. Before the authorities wizened up to the extent of hurt that was being done, we were already smack in the middle of a crisis. Inflation was already up in the higher double digits, so the central bank understandably wanted to curtail money supply and raise rates, but this was happening at the same time that the economy was seizing up, so the tighter monetary policy adopted by the Bank pushed a drowning man deeper under water’.

According to Otti, ‘while it is great policy to keep inflation in check, raising rates at a time of economic downturn appears rather disingenuous’. Higher rates may have kept bank net interest margins up, but it also damaged the repayment capacity of several customers leading to the rising tide of loan defaults witnessed in the year. Indeed the severity of the situation has been masked by the mildness of the impact on the ledgers of the top four banks. A closer look at the books of some of the lower ranked banks throws up a nasty can of soup.

Just how not to grow a bank

Ecobank Nigeria Plc, for example, shocked analysts and investors when it recently declared a mindboggling N52billon loss. At the heart of the problem was a 134 per cent rise in the banks impairment adjustments from N84.5 billion in 2015 to N197.7.2 billion in 2016. To make a bad situation worse was the massive foreign exchange translation losses posted by the bank from its regular operating activities. This was reflected in its profit before tax which crashed from a modest N40.6 billion in 2015 to a major loss of N33.7 billion in 2016, representing a thumping 164 per cent slump in operating earnings. But interestingly the bank’s core business income on its loan activities seemed to have remained resilient. Net interest income (interest income minus interest expense) actually grew by a respectable 25 per cent, rising from N226.5 billion in 2015 to N283.9 billion in 2016. So where were the skeletons buried?

Nowhere; the principle problem during the year was the poor quality of the bank’s loans and advances. The need to make adequate provision for these dodgy assets slapped cold water in the face of the banks management as they tried to salvage a losing battle. A season of lending indiscretion has come to bite the bank hard in the butt.   Loans and advances grew by 27 per cent between 2015 and 2016, but most of the loans were flaky and weak. In a bid to grow its balance sheet rapidly the bank happened to have been a bit careless in granting credit facilities without proper consideration of the prevailing softening of the economy.

Another punch to the banks fragile books came from its portion of the losses posted by its associate companies. The two and a half fold growth in these losses associated with struggling affiliates deflated the banks profit and loss account by pounding 181 per cent, from a loss of N232.2 million in 2015 to a loss of N652.3 million in 2016. In other words the banks associate companies are doing just as badly as ETI itself.  Another problem with ETI is that the bank seems to be struggling with liquidity, as it takes on more interbank deposit support than it has been able to grow its retail and wholesale customer liability base. For example, while customer deposits grew by 26 per cent from N3.3 billion in 2015 to N4.1 billion in 2016, its interbank takings grew a muscular 116 per cent from N256.7 million in 2015 to N616.8 million in 2016. According to one local analysts, ‘ you get the feeling that ETI has gotten to a point in its industry life cycle  were earnings are beginning to drop off, cash flow is becoming difficult and even though gross earnings is rising, it brings little comfort to operational stability.’ As far as this observer is concerned the bank has reached a ‘shakeout’ stage where it must revise its business model, drag down operating costs and rebalance its loan portfolio or, sadly, call time on its patchy history in the Nigerian market.

Indeed second tier or middle market banks in Nigeria are on the edge of a defining moment in their corporate history. Those that are not in their early or middle growth phases are trapped in a shakeout phase where they must either start repositioning themselves for better loan quality, brand distinction, liquidity and market share or they will be joyfully singing as members of the Hallelujah choir of the dead and forgotten.

A peep into tomorrow

The banking sector had a rather mixed time in 2016. While loans and short term investment assets, in the main, performed miserably, foreign exchange revaluation gains, fee based earnings and transfer related charges did quite well. Going forward the banks that will prove capable of withstanding the pressures of an economy slowly inching out of recession are those that take advantage of more rounded loan portfolios, attractively crafted retail deposit products, lower operating expenses and higher consumer value propositions. Forex trading and gains may still remain a mammoth items on bank books in 2017, but the size could shrivel a few stones. For the four largest banks in the country, as in the beginning, so in the end, they will still a few pop bottles of Dom Perignon by year end as they dominate a sector that is not likely to see and sharp changes. But a word of caution if the fiscal and legislative authorities have their way and three trillion (N3 trn) naira of dormant account balances are statutorily removed from banks and sent to the CBN, then 2017 may yarn a new story on creation day.

Source: 2016 audited annual accounts

… Earnings gravy truck in motion (N’b)

Source: 2016 audited annual accounts