The earnings of some of Nigeria’s biggest banks more than tripled in the first three months of 2024 as a result of the record hike in the benchmark interest rate by the Central Bank of Nigeria (CBN).
This development marks a turnaround from when the devaluation of the naira led to huge foreign exchange gains for the banks and boosted their fortunes.
BusinessDay’s analysis of the latest financial statements of eight banks show that their combined after-tax profit rose by 264.5 percent to N1.13 trillion in Q1 from N308.7 billion in the same period of last year.
…GTCO, Zenith, FCMB led in profit growth
The firms are Zenith Bank Plc, United Bank for Africa (UBA) Plc, Access Holdings Plc, FCMB Group Plc, Stanbic IBTC Holdings Plc, Fidelity Plc, Guaranty Trust Holding Company (GTCO) Plc and Wema Bank Plc.
Analysts say the spike in the commercial banks’ earnings was largely fueled by the growth in interest income, driven by effective asset repricing in response to the elevated interest rate environment.
Interest income or revenues are payments that the bank receives from its interest-bearing assets.
“The increase in interest income was the major driver for most of the banks’ profit. If you check their loan books for 2023, it expanded significantly, also year to date we are seeing very significant expansion in loan books,” Olumide Sole, sub-saharan banking research analyst at Vetiva Capital Management, said.
He said the drivers of the loan books expansion are more of translation not because banks are giving out loans and that the loans especially the foreign ones will continue to expand as the naira depreciates.
“The expansion of foreign loans is enough to record a significant growth. Banks are not giving out loans because of the economic situation. They are very conservative so they are giving to only cash generative businesses,” he added.
Further analysis of the statements revealed that the banks’ total interest income was N2.40 trillion in Q1, up from N977.4 billion while loans and advances to customers grew by 108.7 percent to N1298.1 trillion from N617.6 billion.
“The banks’ main business is lending and for them to lend money out they charge a fee which is the interest funds they give. A hike in interest rate can result in a repricing of the asset. Lending is their core business, but they have to reprice their asset, which will continue if interest rates remain high,” Nabila Mohammed, investment analyst at Chapel Hill Denham, said.
She said the banks are enjoying both loans and investment securities because yields in the market are attractive for entry-level and that it was clear at the beginning of the year that the CBN would hike interest rates.
“But the winners will be those that can manage their interest expenses well because the banks can’t be repricing their assets and not rewarding their depositors. The banks should be able to manage their cost of funds by making sure that they have a low-cost deposit mix.”
GTCO, Zenith and FCMB led in profit growth
GTCO recorded the highest growth in profit of 685.4 percent to N457.1 billion from N58.2 billion followed by Zenith with N291.4 percent to N258.3 billion. FCMB had a 209.7 percent rise to N28.8 billion and UBA’s profit grew by N166 percent to N142.6 billion.
Analysts at Cordros Research said in a recent note that GTCO’s interest income advanced by 170.6 percent year-on-year to N281.7 billion, boosted by higher income from loans and advances to customers (91.0 percent), investment securities (307.5 percent), and cash and balances with banks (265.9 percent).
“We note that Holdco’s earning asset increased by 104.3 percent year-t0-date to N10.18 trillion as the high-yielding environment also supported growth in core income,” they added.
A recent note by Vetiva Research noted that FCMB’s performance was driven by growth across all major income lines. “Interest income rose by 90 percent year-on-year to N125 billion, driven by the effective repricing of the bank’s assets in response to the prevailing high-interest rate environment.”
The CBN in March raised its monetary policy rate for the second straight time by 200 basis points to 24.75 percent in a bid to fight inflation. In February, the CBN increased the interest rate by 400 basis points to 22.75 percent.
Before the rate was hiked to 24.75 percent, the apex bank had increased it by 750 basis points to 18.75 percent last July from 11.25 percent in March 2022.
Apart from the MPR hike, the liberalisation of the foreign exchange regime in June weakened the naira from N463.38/$ to N 1459.7/$ as of May 9, 2024. At the parallel market, the naira is being traded at around 1,422.5/$ as against 762/$ before the FX reform.
After the MPR hike in February, some banks started increasing their lending rates. Zenith raised its interest rate by 500 basis points to 30 percent from 25 percent.
GT Bank revised its lending rate by 500 basis points in response to the MPR hike and Stanbic IBTC also increased the interest rate on its loans by 300 basis points.
“The interest rate environment boosted their performance. Foreign-denominated loans will only help in increasing the total loans and the income from it in naira terms will also increase,” Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest Limited, said.
The CBN in March also announced a ten-fold jump in minimum capital requirements for banks, nearly two decades since the last exercise. It aims to enhance the resilience of an industry faced with high inflation, naira devaluation, and a weak economy.
Olayemi Cardoso, the CBN governor, set the minimum capital requirements for Nigerian banks as follows: N500 billion for those with international authorisation, N200 billion for commercial banks with national authorisation, and N50 billion for those with regional authorisation.
