• Thursday, March 28, 2024
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BusinessDay

Banks’ income from investment securities hit N655bn in 2018

Nigerian banks

Analysis of the 2018 audited financial statements of nine lenders that have released full-year results shows income from investment securities increased by 8.45 percent to N655.88 billion, from N604.76 billion as at December 2017, according to data compiled by BusinessDay.

That compares with a 49.011 percent growth in income from bond and treasury bills in the 2017 period, when a drop in crude price stoked a severe dollar scarcity that grounded business activities and tipped the country into its first recession in 25 years.

“In 2016 and 2017, we were in a recession and Treasury yields were at an all-time of 23 percent and the same was for bonds that were as high as 16 percent and 17 percent,” said Ayodele Akinwunmi, head, research and atrategy at FSDH Merchant Bank.

“With improvement in the economy, we will expect loan growth and that will lead to an increase in interest income on loans and advances,” said Akinwunmi.

Lenders in Africa’s largest economy are ingenious as they manage to shield earnings from a volatile macro-economic landscape, by investing in government securities and avoiding lending to all but the blue-chip companies.

Banking sector credit to the economy declined 2.9 percent quarter on quarter from N15.6 trillion in the third quarter of (Q3) of 2018 to N15.1 trillion in fourth quarter of 2018, according to data from the Nigerian Bureau of Statistics’ (NBS) banking sector report.

On a year-on-year (y/y) basis, total banking sector credit to the economy declined 2.5 percent to N61.7 trillion in 2018, from N63.3 trillion in 2017.

Analysts at CSL Stock Brokers Ltd are, however, of the view that banking sector credit to the real economy will remain subdued for as long as yields on government instruments remain attractive.

“Even in the event of a moderation in yields on fixed income instruments, many banks believe that as long as yields remain above 10 percent, they still remain attractive considering that fixed income instruments have no Capital Adequacy Ratio (CAR) implications, are tax free and do not result in NPLs,” said the analysts.

Johnson Chukwu, managing director and CEO of Cowry Securities Ltd, said that banks would make money from investment securities this year but not as they did two years ago.

“Yields have been contracting in the past couple of weeks. A reduction in borrowing cost by the central bank means that returns from fixed income will contract,” said Chukwu.
The slow growth in income from investment securities is taking a toll on lenders’ bottom line (profit).

For instance, Zenith Bank’s net income increased by 11.29 percent between 2017 and 2018, compares with a 34.04 percent uptick recorded between 2016 and 2017. The slower growth is unsurprising because interest income (which comprises both interest on loans and investment securities) dipped by 7.72 percent between 2017 and 2018 while it increased by 23.44 percent between 2016 and 2017 financial year.

Guaranty Trust Bank (GTBank) plc, the largest lender by market capitalisation, saw net income jump by 10 percent as at December 2018, compared with 27.77 percent growth in 2017. Interest income dipped by 6.22 percent in 2018, compared with a 24.74 percent increase in 2017 and 2016.

Lenders will have to intensify their cost control strategies and invest more in technology if they are to continue recording double-digit growth in earning, analysts say.

BALA AUGIE