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Banks face cut in profit as costs weigh

Banks face cut in profit as costs weigh
Huge operating costs are expected to weigh on Nigerian banks’ overall FY 2014 performance, especially as power supply worsened during the year and insecurity, especially in the North East, persisted.
“There has been so much regulatory headwinds and where you have a whole lot of costs associated with doing business, we are going to see some slight reduction in the performance for 2014,” Phillip Oduoza, UBA managing director told BusinessDay, noting, however, that the “banking industry faired very well during the year.”
Banks’ total operating expenses increased to N1.872 trillion in 2013 from N1.193 trillion in 2012.
Consequently, return on assets, (ROA), return on equity (ROE) as well as yield on earning assets (YEA) all declined during the period from 22.2 percent, 2.62 percent and 11.92 percent in 2012 to 19.14 percent, 2.15 percent, 12.13 percent, respectively, according to figures from the Nigeria Deposit Insurance Corporation (NDIC).
“The costs are still quite high, infrastructure is a constraint to the banks so you find that the growth may not be as much as what we expect,” Oduoza stated.
He said for instance, the ATM charge that was abolished brought in another cost that banks are contending with, even though it was brought back but in a small percentage of what it used to be.
“That is going to affect income of the banks,” according to him.
He also pointed to the interest rate in the savings accounts which was moved up from one percent to about 30 percent of the MPR as another cost that would have implication on the books of banks. “Once the MPR goes up, that is additional cost,” Oduoza noted.
But analysts are already predicting that 2015 would be a more difficult year as the banks get set to test their courage against a combination of major challenges that could severely press on their record earnings growth.
Insecurity is still a huge challenge which could mean the banks shutting down more branches in troubled areas, dwindling oil prices resulting to disposable income and less deposits and power supply which is still not looking up.
NDIC had raised concerns that the volume of non-performing loans in the banking sector is also rising.
Oduoza admitted that it is bound to rise because as the banks are doing business and kit static, meaning that as they create risk assets, a particular porting of that will continue to deteriorate.
“The Nigerian banking industry is very stable. If you recall, sometime ago, we de-risked the entire industry and a lot of the toxic assets were sold to AMCON and since then a limit of 5 percent has been put for the non-performing loans of the banking industry and the banks are now operating within that particular range.
“Banks have put in place very strong risk management framework just to ensure that the risk asset quality is very high,” Oduoza noted while explaining banks’ preparedness to take on the challenge ahead.
“I believe that all of us have learnt our lessons from what happened during the last global crisis.”
Oduoza says that the market risk is at its peak but that banks have known to distribute their risks in such a way that they do not have so much concentration in one particular sector.
“The banks are open to business, so you will have the NPLs come up.”
He said this is because the volume of loans that have been created over the period has multiplied several times and so a significant portion of that will fall within the NPLs. “But that does not mean that we are above the threshold of 5 percent.”