Nigeria’s ultra-low Treasury bills yields amid high inflation rate are credit negative for banks, according to global rating agency Moody’s.
The low-interest-rate will continue to compress banks’ net interest income, making them unable to reduce their cost of funding at the same pace, Moody’s said.
“Our negative outlook for Nigerian banks reflects our expectations of weakening credit metrics of the banks,” said Peter Mushangwe, banking analyst at Moody’s.
Interest on most financial instruments, particularly bonds and treasury bills, has been on a free-fall, reaching record lows last year, after a directive by the Central Bank of Nigeria restricting non-bank local investors from investing in short-term OMO bills sparked liquidity glut amid a limited pool of investible instruments.
For the most part of last year, investors in Nigerian short-term instruments parted with negative real returns with commodity prices staying above returns on most assets.
Average yields on T-bills closed the year below 1 percent from about 14 percent some two years ago, while yields on 5-year government bond went as low as 0.49 percent from the 14.50 percent coupon issued in 2016.
While the low interest environment meant the Federal Government could raise cheap debt, it has continued to dampen banks’ profitability, given that Nigerian banks hold a significant portion of their total assets in investment securities (mainly treasury bill and bonds), at about 30 percent as of September 2020, with just below 70 percent of these holdings maturing within one year.
Results released up to the 3rd quarter of 2020 have shown a deterioration of banks’ profitability as revenue growth was harmed by low-interest income, according to Moody’s.
The decline in net interest margin (NIM) affected most of the banks, except for Guaranty Trust Bank Plc (B2 negative, b22) and Sterling Bank Plc (B2 negative, b3), whose NIMs remained relatively high. Conversely, Union Bank of Nigeria Plc (B2 negative, b3) and FBN Holdings, parent of First Bank of Nigeria Limited (B2 negative, b3), declined the most at 274-438 basis points between year-end 2016 and September 2020.
“We expect NIMs to continue to decline in 2021, especially for midsize banks that have limited room to reduce their cost of deposits. The larger banks will be able to withstand the deteriorating margins,” the rating agency said.
Expectations of a reversal in interest rates happening in the short to medium term, which could give a facelift in the interest incomes of banks, appear to be waning
While giving a review on the development of the Nigerian Stock Exchange, Oscar Onyema, its CEO, said he doesn’t see a normalization of rate soon, after the market returned 50 percent last year to become best performing stock market globally, helped by the low-interest rate regime.
Godwin Emefiele, governor of the CBN, had also hinted last year he would continue to pursue a pro-growth policy that will be positive for the stock market.
“We do expect that interest margins will continue to come down this year. Banks have limited rooms to reduce their cost of deposits,” Moody’s said.
“However, the banks are trying to mitigate the negative NIM effect on profitability by containing their cost bases. In September 2020, bank operating costs grew less than inflation, and banks have room to enhance efficiency further given the still high cost-to-income ratio at over 60 percent,” the rating agency said.
“The high cost-to-income ratio partly reflects banks’ high technology investment amid slow take-up of digital products, although the pandemic is increasing the usage of digital platforms, which will increase transaction volumes and support fee income,” it said.
The economy slipped into its worst recession last year, contracting 6 percent and 3.23 percent, after the pandemic shrank consumer wallet, disrupted economic activities, and caused banks to restructure about $20 billion in loans.
Mushangwe said Africa’s economy would continue at a slow growth at 2.1 percent in 2021.
Mushangwe, who spoke in an interview on CNBC Africa, noted that although Nigerian banks’ capital adequacy ratio remains robust, maintaining good liquidity buffers that are above 30 percent requirement last year, the banks more than doubled their provisions which eroded their profitability.
In addition to that, prime lending rates of banks are also down to 11 percent from about 15 percent in 2019.
Exacerbated by the lingering coronavirus pandemic and the economic impact on businesses, Mushangwe expects non-performing loans to swell to 11 percent in 2021 from 6 percent last year.
“The slow economic growth caused by the pandemic will continue to affect borrowers this year. We expect NPL to increase from 5 percent to 10 percent this year. This is because of the foreign currency shortages, affecting a lot of foreign currency borrowers in Nigeria, as about 40-45 percent of loans in Nigeria are in foreign currency,” Moody’s said.
