Last year saw series of policy directives from the Central Bank of Nigeria (CBN) to the Deposit Money Banks (DMBs). But not all the CBN’s changes help banks make money, according Coronation Merchant Bank Limited.
Nigeria’s banks spent the second half of 2019 reacting to policy changes aimed at increasing their engagement in the economy. In July 2019, the CBN introduced the policy requirement to target Loan to Deposit Ratio (LDR) at a minimum of 60 percent by the end of September 2019 and later increased it to 65 percent by the end of December 2019.
In October, the banks’ corporate customers were barred from buying new Open Market Operation (OMO) bills from the CBN, an action which sent Treasury bill rates and loan rates tumbling.
“The desired effect was achieved, because the private sector credit began to grow again after a long period of stagnation,” analysts at Coronation Merchant bank said.
Gross credit in the industry grew by N1.9 trillion between the end of May 2019 and the end of December 2019; channelled primarily to employment-generating sectors such as agriculture and manufacturing. This is in addition to increased lending to the retail and SME segments, expected to help boost domestic output growth in the short to medium term in support of the economic diversification agenda of government.
The recently announced reduction in card maintenance and fund transfer fees in December 2019, is a negative development the analysts said, especially, in view of the positive trend in fee and commission income in recent years.
In its year ahead 2020 report, titled ‘Re-risking the financial system’, the bank said re-pricing deposits when loan rates are falling is difficult and growing loans rapidly may open the way to increases in Non-Performing Loans (NPL).
The banking industry NPLs reduced further to 6.1 percent at the end of December 2019, from 6.6 percent at the end of October 2019.
Zenith Bank’s asset quality has remained strong through the years, the NPL ratio has remained sub 5.0 percent over the last five years and Cost Of Risk (COR) of 1.0 percet annualised for nine months 2019 gives the analysts confidence that the impact of impairment charges on the bottom line will be low at full year 2019 result.
Strong asset quality and low impairment charges have resulted in increased retained earnings and a build-up of the bank’s capital base (capital adequacy ratio of 23.8% at 9M 2019).
“Given the regulatory minimum LDR of 65 percent effective December 31, 2019, the bank is in a comfortable position to grow its loan book without raising additional capital,” analysts at Coronation said.
For GTBank, the report said the bank did not grow risk assets in aggregate between 206-2018, but a change in this trend could be seen in 2019e and 2020f. In order to comply with minimum LDR, GTbank will have to grow its loan book by approximately N220 billion (+13.8%) above the 9M number, or reduce its deposits. “If it chooses the former we may see an increase in COR and impairment provisions in 2020f,” the analysts said in the report.
According to the report, Access Bank’s asset quality deteriorated upon its merger with Diamond bank. The NPL ratio increased from 2.5 percent in FY 2018 to 6.4 percent in 9M 2019.
“If its recent acquisition in Kenya goes ahead, then we think there may be a further slight decline in asset quality in aggregate in 2020f. Therefore, we do not see any substantial reduction in impairment provisions in 2020f”.
However, the report noted that Treasury bill rates have fallen so low that several banks are likely to pay dividends much higher than Treasury bill yield, in some cases more than twice the Treasury bill yield.
