• Tuesday, May 28, 2024
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BusinessDay

Intense competition raises bank’s operational costs

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Fierce competition by banks for deposits and the race to acquire cutting-edge technology to best each other in the area of service delivery, are threatening operational efficiency in the financial services industry, BusinessDay investigations have shown. To this end, the cost to income ratio is getting higher.

Fuelled by suspicion, the banks have continued to abhor collaboration and joint efforts, especially in areas of Information Technology acquisition, which according to industry watchers, would have reduced cost of operations.

To most observers, industry collaboration is needed not only for IT acquisitions, but also in labour related issues, so as to reduce opposition from staff, over attempts to outsource non-core services which are becoming major cost centres.

Growing cost of operations has been a top item on the agenda the Bankers’ Committee meeting lately, but attempts to come together to tackle it has been hampered by individual banks, especially the big banks which are opting to go alone, rather than pooling resources together for the benefit of all and reducing cost of operations.

The cost saving measures being introduced by the Central Bank of Nigeria (CBN) are aimed at reducing cost of operations and enhance its reforms for a healthy financial services sector, via competitive banking structure, reliable/secure payment system and reduction of the overbearing tendencies of the informal sector.

Cost to income ratio (CIR) examines relationship between expenses, such as administrative costs and earnings, to operating income of a bank with emphasis on how much is needed in a given period of time to generate one naira in revenue. Consequently, the CIR measures the output of a bank in relation to its utilised input.

For instance, GTBank has the lowest cost to income ratio (CIR) of 43 percent of the 2012 International Financial Reporting Standard (IFRS) compliant results released so far. That means that for every one naira generated, 43 kobo was spent.

“The CIR at 43 percent, remains best-in-class and represented an improvement on the 47% recorded in FY11, say analysts with Renaissance Capital (Rencap).

Further analysis on the 2012 results showed that Fidelity Bank’s costs grew by 35 percent year on year (YoY) and 70 percent quarter by quarter, while its CIR deteriorated to 67 percent from 66 percent, for the third quarter of last year. Zenith Bank recorded CIR of 53 percent, down from 55 percent in the third quarter of last year, while Skyebank recorded 57.6 percent.

According to a banker, the post-banking sector reforms have engendered competition and also made expectations from shareholders sophisticated to the extent that banks

will be judged on the individual performances.

“Shareholders’expectations have grown as their appetite for dividend has grown, having been denied for quite some time. Also, customers are looking out for banks with the best services and products and to that extent, some banks have decided to go on their own, which is engendering competition rather than cooperation that would have produced a healthier banking industry,” he said.

Emeka Onyejiaka, a financial analyst said that apart from the unhealthy competition, dilapidated infrastructure is another challenge that is responsible for the high operating cost, adding, “when you add up all these and opposition from staff over outsourcing, cost of operation is bound to be on the rise.”

 

JOHN OMACHONU