Nigeria’s big banks spent less from operating income than their mid-tier counterparts in the first six months of 2019, as top lenders benefited from economies of scale.
On the average tier-one banks spent N63 from every N100 made as operating income in running their business while midtier lenders spent N81 on running costs.
Cost-to-income ratio gives a clear view of how efficiently the bank is being run and is calculated by dividing the operating expenses by the operating income generated.
Cost-to-income ratio is important in determining the profitability of a bank. The lower the ratio, the more efficient the bank is.
“Tier-one banks operate on a larger scale, hence they are able to spread fixed costs on the higher income that they generate,” said Gbolahan Ologunro, analyst at Lagos-based CSL Stockbrokers Limited.
According to Ologunro, tier-one banks are more efficient than their midsized counterparts given their bigger balance sheet which enables them to squeeze out more earnings from their interest-bearing assets which feed through into higher operating income.
Banks with the lowest cost-to-income ratio in the period was Guaranty Trust Bank ( GTB) with 34.84 percent and Stanbic IBTC recorded 35.08 percent. Zenith Bank had 56.83 percent.
Access Bank and Fidelity Bank recorded 67.07 percent and 67.7 percent respectively, while First Bank’s cost- to- income printed at 80.38 percent, the highest among Nigeria’s top lenders.
On the flip side, Ecobank Transnational Incorporated had the highest among peers in the industry in excess of a hundred percent. This means the Pan-African bank spent more than it earned as operating income.
On average, Nigerian listed banks spent about 73 percent of their operating income to run business, implying they have not able been to minimize cost and would have to intensify their cost-control strategy as they are spending more on each unit of revenue.
Analysts say the inability of Nigerian lenders to cut cost might be because their revenue is not growing in tandem with cost.
“Some costs are market-driven and impacted by inflation. Nigeria’s inflation rate is in double-digits and will always reflect in costs, no matter how banks strive to manage cost,” said Emmanuel Noko, senior economist at Lagos-based advisory firm, M&C Consulting Limited.
Noko maintained that sluggish recovery of the broader economy and relatively high inflation rate are headwinds to banks’ efficiency.
According to data by National Bureau of Statistics, Africa’s biggest economy which worth about $400 billion dollars grew slowed for the second consecutive quarter to print expansion at 1.94 percent, heightening doubt if the country would meet Federal Government’s 3.01 percent growth target for 2019.
Also, the inflation rate slowed for the third straight month to 11.02 per cent in August, buoyed by favourable harvest and weak consumer demand. However, the rate is slightly above the country’s apex bank 6-9 per cent target.
The low-interest environment which has seen some lenders record declines in interest income means no more free money for lenders, underscoring the need for them to be more cost-effective to boost future profitability.
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