How banking sector maintained resilience in 2020 amid Covid-19 pandemic

In spite of the continued lull in global financial markets, adverse shocks to global capital flows and falling oil prices due to the impact of the outbreak of COVID-19 pandemic early this year, the financial sector remained stable in 2020 as the key financial soundness indicators remained resilience.

Stability of the banking system has been sustained throughout the year as the industry’s capital adequacy and liquidity ratios were 15.5 and 35.6 per cent in October 2020, compared with the respective prudential thresholds of 15.0 and 30.0 per cent. Non-performing loans ratio improved further to 5.72 per cent, though slightly higher than the regulatory limit of 5.0 per cent.

Profitability performance also remained satisfactory buoyed by improvement in non-interest income, said Aishah Ahmad, deputy governor in charge of Financial System Stability (FSS) said in her personal statement at the last Monetary Policy Committee (MPC) meeting in November 2020

She said the financial system retained its operational and financial resilience, sustaining critical support to the economy through the crisis. Credit growth remained on an upward trajectory with robust soundness indicators and sustained decline in average lending rates.

The trend generally indicated a preservation of the sound health of the banking industry, and underscored efficacy of regulatory/supervisory measures, Folashodun Shonubi, deputy governor of CBN in charge of operations said.

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Ahead of the release of full year 2020 financial results, banking sector gross earnings is expected to improve marginally by 2.0% to N5.0 trillion in 2020 from N4.9 trillion in 2019, according to a report by Afrinvest West Africa.

However the sector’s gross earnings stood at N3.6 trillion at the end of Nine months. The industry’s profit before tax which stood at N750.5 billion in 9month 2020 is expected to rise to N1.2 trillion in full year 2020 from N1.1 trillion in 2019, the report indicated.

Assessing the performance of the banking sector in 2020, Ayodeji Ebo, senior economist/head, research & strategy, Greenwich Merchant Bank, said the year 2020 was a mixed tale for the banking industry, as significant headwinds ranging from the global pandemic to the low yield environment and even stiffer regulations pressured operating margins for major banks. Nonetheless, performance remained resilient as supporting factors from non-interest income like trading revenue and the heightened level of electronic transactions served as a cushion for profit margins. On a yearly assessment, the volume of E-payment Channels was up by a whopping 203.73%, while valued transactions recorded an uptick of 551.6%.

“Asides this, we believe consistent regulatory reviews and the zeal to minimize vulnerabilities in the banking industry by the regulator strengthened the banks’ capital base,” he said.

On his part, Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, was of the view that banking sector in 2020, fared relatively well when compared to other sectors of the economy despite the negative impact of COVID’19.

This much was confirmed by the National Bureau of Statistics (NBS) numbers which show that Financial Institutions especially the banks, together with the Information and Communication sector, have remained in the positive territory with respect to real GDP growth, year on year, thereby helping to moderate the current economic recession.

He said this equally corroborated by the CBN which confirms, through its November MPC communiqué, that financial soundness indicators for banks in 2020 actually improved with Non Performing Loans a little above the CBN 5% threshold while Capital Adequacy ratios and liquidity ratios are above the CBN benchmarks of 15% and 30% respectively. Of note too is the fact that according to the CBN, aggregate credit to the real sector has been on the increase since 2020.

The performance of the banks this year was bolstered by the surge in online transactions in the wake of the pandemic leading to many banks recording increases in noninterest income according to their 9-months unaudited financial statements, he said. Not surprisingly, banking stocks have outperformed the stock market thus far especially tier-1 banks stocks of GTB, Zenith, FBN, Access and UBA with year-todate returns higher than the NSE All Share Index of about 40%.

With the decline in economic activities, the CBN instituted measures in the banking system, in order to prevent an economic crisis from spilling over into a financial crisis.

“Inaction on our part would have led to a wave of bankruptcies by firms along with rising unemployment, which would ultimately have a significant impact on the balance sheet of banks,” Godwin Emefiele, governor of CBN said.

As a result, apex bank ensured that; banks made adequate capital provisions to cover for unexpected losses.

Thus, the CBN supported viable businesses that had been affected by the pandemic through access to its intervention funds; and the regulator enabled banks to restructure loans granted to sectors affected by the pandemic.

Obadan Mike, member of the MPC admitted that the total assets, deposits and credit of the banking industry have also grown remarkably. For example, because of the Loans to Deposit Ratio policy of the CBN and other related measures such as the Global Standing Instruction, the total gross credit to the economy by the deposit money banks increased by N3.97 trillion from N15.56 trillion at the end of May, 2019 to N19.54 trillion as at November 13, 2020.

Credit growth was largely recorded in manufacturing, consumer credit, general commerce, information and communication, construction and agriculture.

One of the major policies that shaped the sector in 2020 was the reduction of the minimum savings deposit rate to a minimum of 10 percent of the Monetary Policy Rate (MPR) subject to negotiation of the rates with customers.

The banks never negotiated with customers but fixed the rate at 1.25 percent with MPR of 12.5% and later 1.15 percent from September under 11.5% MPR regime.

“Again, like the above policy, stakeholders perceive this policy as promoting the profit interests of the DMBS. I know that this is not the intention,” Obadan said.

But with widening disparities between lending and savings deposit rates, the DMBS are smiling at the expense of ordinary citizens and MSMES. Therefore, there is the need to review the minimum savings deposit rate upwards to encourage small savings and narrow the unacceptable interest rate spread.