Banks to boost loan growth by 15% – Stanbic IBTC

Banks in Africa’s most populous nation will be able to close the revenue gap created by declining interest rates by lending more into strengthening economy, according to Stanbic IBTC Holdings Plc analyst Muyiwa Oni.

Oni made this known while responding to questions from Bloomberg reporters.

A drop in yields on short term securities with its negative impact on profit margins could force banks to start lending to the critical sector of the economy. 

Some banks may boost loan growth to 15 percent this year compared with 10 percent in 2017, said Oni.

Banks profited from fixed income on short term government securities when yields were attractive last year as they reduced lending to high risk sector.

While the cumulative total loans and advances of 13 big lenders by 4.15 percent to N13.31 trillion in the nine months period to September 2017 from the N13.83 trillion recorded the previous year, interest income on loans and advances and treasury bills surged by 26.15 percent to N2.14 trillion in the period under review from N1.70 trillion the previous year.

This means that banks are ingenious to have taken advantage of attractive yields in boosting revenue as the devaluation of the currency in 2016 was a boon for them in that period.

However, banks could be forced to start lending to the economy as a drop in yields due to slower issuances by the central bank in 2018 is expected to put pressure on profitability.

“The slowdown in T-bill issuance marks a change of strategy as the government looks to increase its financing from external sources and longer-dated domestic issuances. Record T-bill issuance in 2017 helped support the Central Bank of Nigeria’s strategy to maintain naira exchange-rate stability, according to analysts at rating agency, Flitch.

“We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018. The CBN’s latest issuance schedule shows N1.1 trillion ($3.6 billion) of rollovers in 1Q18 against N1.3 trillion of maturing bills. In 2017, rollovers fully covered maturing bills.

Banks crave easy money and become cautious of those high risk sectors as total credit to the private sector in 2017 witnessed a marginal decrease of 2.34 percent to N15.74 trillion compared with N16.12 trillion in 2016.

The most affected of these sectors are the transportation & storage, general commerce, education and information and communication. Credit to players in the transportation and storage sub sector declined by 26 percent to N332.08 billion in 2017, down from N450.75 billion in 2016. From N1.31 trillion in 2016, credit to the general commerce sub sector fell by 21 percent to N1.04 trillion in 2017.

Analysts also attribute the slowdown in credit to the economy to the higher interest rate in the economy.

“Credit growth will be a big driver” in 2018, Oni said. While lower rates may reduce the cost of funding for banks, net interest margins may still narrow by anything from 100 basis points to 200 basis points this year, Oni Summed.

BALA AUGIE