Nigerian banks’ profitability seen threatened by fintech platforms

One potential threat to the overall profitability of Nigerian banks comes from fintech, specifically internet banks such as Kuda, Carbon and Rubies, according to a report by Coronation Asset Management.

Kuda is Nigeria’s first mobile-only bank licensed by the Central Bank. It offers zero card maintenance fees, free transfers, and automatic savings.

Carbon is a digital bank offering that believes access to credit and quality financial services is a human right. Its mission in Nigeria, Ghana and Kenya where it operates is to empower all people with the financial access they need to pursue a life of dignity and prosperity. It empowers individuals with access to credit, simple payments solutions, high-yield investment opportunities and easy-to-use tools for personal financial management.

Rubies is a fully digital banking platform, offering zero-fee banking targeted at millennials, young professionals, SMEs, quasi-financial institutions and FINTECH.

“The obvious advantage they (internet banks) have over conventional commercial banks is low cost”, Coronation Asset Management said in its report on Nigerian Banks titled “Nigerian Banks, Resilience Built-In”.

In the report released Friday, June 25, Coronation Asset Management noted that “These internet banking platforms are attractive to millennials and other tech-literate customers and require little or no physical banking presence (though CBN rules do, for example, require them to own a physical safe)”.

“However, it is the customer’s banking experience that is the key differentiating factor here. Internet banks are for people who do not like visiting their local bank branch. Convenience and speed of transactions are significant advantages for many customers.

“Internet banks have been quick to add on both investment products (it is possible to put aside a certain amount into a savings account every month) and overdrafts (with the credit score based on analysis of income and payment trends)”, Coronation noted in the report.

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“Users report a much more efficient service than with conventional banks. With many customers accustomed to learning from online group chats, these banks host user chats where customer queries are answered.

“It can be argued that these processes improve customer engagement and ultimately lead to customer education. We would not be surprised to see some Nigerian internet banks attempt to offer the trading services offered by Revolut and Monzo in the UK”, Coronation Asset Management further said.

Though, most of the conventional banks Coronation Asset Management researchers spoke with are apparently not concerned with this threat.

“They see themselves as partners with internet banks, for example offering their customers cash withdrawals and supplying them with clearing service.

“At the same time, they offer their own USSD-based (Unstructured Supplementary Service Data) offerings and therefore compete with internet banks in some areas. Time will tell whether the conventional banks are justified in their confidence, or merely complacent”, they noted.

The report shows that Nigerian banks’ earnings have been remarkably resilient over the interest rate cycle, their profitability is improving over time and their stock values are remarkably cheap compared to Ghanaian and Kenyan bank stocks.

In addition to looking at the challenge posed by Fintech in general and by digital banks, Coronation researchers looked at the banks’ Net Interest Margins (NIM) and spread over the long term and found a remarkable degree of resilience through several interest rate cycles.

“This suggests that investors have little to fear when it comes to current fluctuations in interest rates, while the banks themselves stated that they are confident they can re-price deposits and loans advantageously this year”, according to Coronation Asset Management research analysts. They also look at the growth record of the banks and found that, with one notable exception, balance sheet growth has been elusive, “something that becomes clear when we re-state key metrics for the effects of inflation over time.”

Also looked at in the report is the Return on Average Equity (RoAE), or more simply Return on Equity (RoE) and the Return on Average Assets (RoAA) or Return on Asset (RoA) of the banks over 10 years, “making note of the gradual improvement and convergence in RoAEs over this period.”

In terms of valuations, and despite a significant rally in share prices over the past year, it noted that Nigerian bank stocks look remarkably cheap, both in relation to other Sub-Saharan African banks and in relation to their own valuation history.

“Five years ago the median prospective price-to-earnings (PE) ratio was around 5.0x. Now it is 2.5x. This downward shift in ratings has exposed meaningful value for today’s investors, in our view.

“We have bank-specific sections, and 3-year financial forecasts, and recommendations for six listed banks: Zenith Bank; GT; Access Bank; FBN Holdings; UBA; Stanbic IBTC. On our Buy list we feature Zenith Bank; GTCo; Access Bank; UBA; and Stanbic IBTC. On our Hold list we feature FBN Holding”, Coronation Asset Management further said.