Five takeaways from Nigeria’s biggest banks’ half-year results

Analysis of the half-year financial results of Nigeria’s tier-one lenders, the country’s biggest lenders, revealed how the industry and individual institutions performed in the first six months of 2021.

The five lenders reported a combined 5.12percent growth in their half-year profit to N371.1 billion in June 2021 from N353.02 billion in 2020 on the back of the surge in interest income.

Below are some of the highlights of the financial statement that was released to its shareholders and the investing public through the Nigerian Exchange Group (NGX).

Half-year profit hits highest in nine years

The biggest banks in Africa’s most populous country reported the highest half-year profit in seven years in 2021.

The five tier-one banks recorded a combined 113.18 percent growth in their half-year profit to N371.1 billion in June 2021 from N174.08 billion in 2014.

Interest income

The performance was largely driven by a 15.4 percent increase in net interest income to N757 billion in 2021, N101 billion more than the N656 billion reported in the corresponding period of 2020.

Meanwhile, the majority of the lenders’ income was obtained from account maintenance and electronic products. Nigeria’s five biggest lenders attracted N48.91billion from account maintenance fees, N16.6 billion more than the N32.31 billion it reported in June 2020. Its fees charged on electronic products was up by N24.97 billion to N83 billion in June 2021 from N58.03 billion in the same period of 2020.

CRR

The banks attained the record despite the limited resources at their disposal. The record-high cash reserve requirement (CRR) of 27.5 percent by the Central Bank of Nigeria (CBN) is cribbing the lenders’ profitability, according to market analysts.

The CRR is the amount the CBN debits from banks accounts in compliance with its monetary policy objective of mandatorily keeping cash on behalf of banks. The amount is not available for banks to use.

27.5%

In a quest to moderate inflation amidst efforts to maintain a stable exchange rate, the Monetary Policy Committee (MPC) of the CBN increased CRR and standardised it to 27.5 percent for both merchant and commercial banks. The standardised CRR was implemented alongside discretionary deductions.

According to Agusto & Co.’s flagship 2021 Banking Industry Report, the industry’s restricted cash reserves exceeded N9.5 trillion in 2020 and translated to an effective CRR of 37 percent.

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“We believe the elevated CRR level moderated the industry’s performance and liquidity position during the year under review,” research analysts at the Lagos-based credit rating agency said.

Explaining how the CRR policy is affecting the banks’ profitability, Agusto & Co. said the banks could have earned as much as N482billion if the lender had invested the cash they kept with CBN in a fixed income instrument.

“Assuming the sterile CRR were invested in treasury securities at 5%, N482 billion would have been added to the industry’s profit before taxation. This would have increased the industry’s return on average equity (ROE) by 11% to 31.6% in the financial year ended 31 December 2020.”

Meanwhile, it is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 percent.

Among other factors, the policy by the central bank that requires banks to keep the cash they could have used to grow their bottom line with the regulator may have also affected investors’ appetite for the stocks of the Nigerian banks.

A recent report by Bloomberg revealed that Nigerian banks are some of the cheapest stocks in Africa.

Four of the five African stocks with the lowest price-earnings ratios among companies valued at $500 million or more are Nigerian lenders, data compiled by Bloomberg show: United Bank for Africa Plc, Access Bank Plc, FBN Holdings Plc and Zenith Bank Plc. Johannesburg-traded steelmaker ArcelorMittal South Africa Ltd. completes the quintet.

Naira devaluation in the last seven years is also another factor that has stunted the banks’ profitability as the weaker currency increased their risk-weighted assets related to their foreign currency loans, putting negative pressure on their capital metrics.

According to Moody’s naira devaluation is a concern for Nigerian banks’ credit book and capital metrics because “they have a high proportion of foreign-currency-denominated loans”.

While banks make money from foreign exchange either by using the capital to buy and sell foreign exchange in the inter-bank market or by helping their customers buy foreign exchange from the CBN, the currency depreciation meant that the lenders longer have as dollar-denominated assets in their balance sheet as they used to a few years ago, and the regulator has said that assets must match liabilities.

A foreign exchange revaluation gain, which is part of other income in the profit and loss account, is an exceptional item that adds impetus to profitability.

The 10 largest banks by market capitalisation made a foreign exchange loss of N4.23 billion in December 2019 from a gain of N176.94 billion the previous year.

A breakdown of the financial results of Nigeria’s biggest lender in the first half of 2021 showed how resilient some performed compared to their industry peers.

Zenith Bank, the country’s second-biggest lender by asset, outperformed its tier-one counterparts to record the highest half-year profit in 2021 as net income on fees and commission surged.

N106.12bn

The bank’s half-year profit grew by 2.29 percent to N106.12 billion in the six months to June 2021 from N103.83 billion reported in the corresponding period of 2020. The half-year profit is the highest the lender has reported in nine years.

Zenith Bank’s profit in the review period was 22.06 percent higher than Access Bank’s, the biggest lender in Africa’s largest economy. With a half-year profit of N86.94 billion Access Bank took the second spot as GTB and UBA reported N79 billion and N61 billion, respectively.

FBN Holdings completed the big five lender’s list with N38 billion, the half-year profit reported by the lender was its highest in six years.