Competition has been intensifying lately in Nigeria’s financial services industry, particularly in its banking system.
A merger between tier-one lender, Access and mid-tier Diamond bank has catapulted the new entity which begins operations as a single firm today, into Nigeria’s largest bank by a couple of metrics.
The new Access Bank will have total assets of just over N6trillion, and 29 million customers, giving it enough levers to pull to drive profitability going forward.
While Access Bank will now stake its claim as the biggest in the 2 areas (asset base, customers), it will still play catch up, compared to other banks in some ratios and measures of profitability.
Five tier one lenders, Zenith Bank, Guaranty Trust Bank (GTB), United Bank for Africa (UBA), Access Bank and FBN Holdings (FBNH), combined control about 70 percent of banking assets and deposits in the country.
As at full year (FY) 2018, the bank with the biggest return on equity (ROE), however, was Stanbic IBTC holdings (not even a Tier one bank), at 34.5 percent.
The return on equity or ROE is a profitability ratio that investors regularly look at, that measures the ability of a firm to generate profits from its shareholders investments in the company.
In other words, the ROE ratio shows how much profit each naira of common stockholders’ equity generates.
The ROE for other Tier one lenders as at FY 2018, stood at 30.9 percent for GTB, 23.8 percent for Zenith, 19 percent for standalone Access Bank (Diamond Bank has not released FY 2018 results), and 15.2 percent for UBA.
Note that the higher the ROE the better, and FBNH has also not released FY, 2018 results (so the firms ROE is unavailable to be computed) as at time of writing.
Ability to control costs is another area that banks will be competing on which should help them to drive profitability.
By this measure, GTB takes the top spot with a cost to income ratio of 36.6 percent as at FY, 2018.
The cost-to-income ratio is a key financial measure, particularly important in valuing banks.
It shows a company’s costs in relation to its overall income.
The ratio gives investors a clear view of how efficiently the firm is being run, and the lower it is, the more profitable the bank will be.
For instance Access Bank’s gross revenues of N528.7 billion as at FY 2018, was 21 percent higher than GTB’s which came in at N434.7 billion for the period.
When one drills down to profits which is where returns to investors and shareholders flow from, Access Bank’s pre-tax profits of N103.2 billion was only 48 percent of GTB’s which came in at N215.6 billion.
The major reason for this was how efficiently GTB is managing its affairs and controlling costs.
Other Tier-one lenders cost-to-income ratios were Zenith Bank 49.3 percent, Access Bank 62.2 percent and UBA 63.9 percent.
Zenith Bank still maintains its top spot as the most profitable bank overall with pre-tax profits of N231.7 billion, while in terms of non-performing loans (NPL), Access has the least exposure with an NPL ratio of 2.5 percent, Zenith (5%), UBA (6.4%) and GTB (7.3 %).
The NPL ratio is a measure of a bank’s nonperforming loans to the total amount of outstanding loans in the bank’s portfolio, expressed as a percentage.
We expect Access Bank’s NPLs to rise once Diamond Bank has been fully digested.
Source: Company Financials
The four Tier-one banks had combined net loans of N7.02 trillion, with Access Bank leading the pack at N2.1 trillion, Zenith N1.8 trillion, UBA N1.72 trillion, and GTB N1.40 trillion.
In terms of loan growth UBA led with a 3.9 percent increase for the period, followed by Access at 3 percent.
Zenith and GTB recorded negative loan growth of 13 percent respectively, a sign of the difficult macro environment, opportunity for risk free investments in government securities and general risk averseness.
For Nigerian Banks the bigger the size, the better able they are to drive profitability and make investments necessary to stay competitive and remain innovative.
However size is still relative, when compared to lenders in the rest of sub-Sahara Africa and South Africa in particular, which vies with Nigeria as the largest economy on the continent.
The four banks (Zenith, GTB, Access and UBA), had combined total assets of N19.1 trillion or $53 billion as at year end 2018.
One of South Africa’s biggest banks First Rand had total assets of R1.2 trillion or $84 billion as at 2018.
Furthermore when measured as a percentage of the economy (GDP)Nigerian banks are lagging most frontier and emerging markets peers in terms of size (total assets as percentage of GDP) or loan book (credit to private sector as percentage of GDP).
This goes back to the argument for Nigerian Banks to fundamentally change their strategy and become more relevant to the needs of the everyday Nigerian, by providing solutions beyond just being keepers of demand deposits for a fee.
Any bank able to crack this model will surely become the biggest of them all, in all the major metrics used in measuring bank size and profitability.
PATRICK ATUANYA
