Banks feel pain as low-yield environment hits revenue

Nigeria’s largest banks are feeling the pains of a dovish monetary environment as revenues have touched the negative region for the first time in four years.

The largest lenders saw their combined interest income and similar charges, a significant component of revenue, decline by 1.81 percent to N2.11 trillion as at September 2020, according to data gathered by BusinessDay.

Analysts attribute the drop in revenue to punitive rules imposed by the regulator in order to force banks to extend credit to the economy and spur economic growth.

First, banks have been forced to lower interest in a bid to meet the loan-to-deposit rules, as the central bank reduced the monetary policy rate (MPR) in a bid to support the economy during the coronavirus pandemic period that stoked business paralysis.

Also, the decision of the regulator to bar non-financial companies from its Open Market Operations as well as a cut in cash reserve ratio to 22.50 percent from 27.50 sent Treasury bill yields crashing to unprecedented levels.

“Banks will rather remain on low profitability for the most part of next year than lend to bad borrowers,” said Wale Okunrinboye, equity research analyst at Sigma Pensions Limited.

“The question we should be asking ourselves is whether the central bank can keep the interest rate low till the end of next year. At one point, things will blow up. And the naira will continue to go up unless oil prices reach between $70 and $80 per barrel,” said Oknurinboye.

According to Okunrinboye, the government should make fundamental reforms that create loans, because some of the loans that are being extended at the moment will go bad once there is a shock.

Banks had made profit from packing money into short-term government securities when juicy yields were hovering between 18 percent and 22 percent, as their cumulative interest income and similar charges spiked by 26.0 percent. Net interest margin (NIM), which measures the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders, has fallen to five-year low.

“The cost of funds is also expected to reduce across board due to a drastic reduction in the fixed deposit rates amid the low interest rate environment,” said analysts at United Capital Limited.

First Bank Holdings plc’s interest income reduced by 6.83 percent to N297.71 billion as at September 2020, that compares with a jump of 27.15 percent in 2017 financial year, according to the data gathered.

Zenith Bank, the largest lender by total asset, saw interest income reduced by 1 percent to N318.82 billion in the period under review, which compares with an increase of 26.64 percent recorded in 2017.

Access Bank plc’s interest income fell by 7.34 percent as at September 2020 to N375.28 billion, but that compares with 35.68 percent jump revenue in 2017

Guaranty Trust Bank, the largest lender by market capitalisation, saw interest income increased by mere 1.80 percent to N238.23 billion as at September 2020, that compares with a surge of 36.64 percent in 2017.

United Bank for Africa, the pan-African lender, recorded 6.45 percent increase in interest income to N317.14 billion as at September 2020, compares with a surge of 30.11 percent in 2017.

The implication of low margins is that profitability will decline, and they have to rely on gains from foreign exchange revaluations and cost reduction to weather the storm caused by the Covid-19 crisis and difficult operating environment.

However, such gains are one off events that do not recur at all times in the books of the company. Keeping operating costs low in a country where businesses run on diesel oil to power generators at factories and branch offices is a herculean task.

A slow economic recovery means bad loans will spike as the lockdown imposed by the government to curb the spread of the coronavirus hindered customers from meeting their obligations.

Nigeria’s gross domestic product shrank 3.6 percent in the three months through September from a year earlier, compared with a -6.1-percent, the statistics body said, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortage weigh on output.

The International Monetary Fund (IMF) has announced that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. But the global lender expects Nigeria’s economy to rebound by 2.6 percent in 2021.