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Banks lose juicy yields as income from government debt slumps

Loans

Nigerian largest banks no longer enjoy juicy yields that used to spare them from profit pains as income from government debt slumps for the first time in four years.

For the first six months through June 2020, the largest lenders realised N456.33 billion income from treasury bills, which represents a 12.20 percent reduction from 2019’s N519.75 billion.

Analysis by BusinessDay shows income from government securities rose by 16.20 percent to N519.75 billion in 2019 from N447.25 billion in 2018. The item increased by 11.10 percent to N447.25 billion in 2018 from N402.76 billion.
Income from government securities makes up 48.78 percent of total interest income on loans and similar charges in 2020.

The sizable liquidity coming to the market in the fourth quarter (Q4) will keep the yields suppressed, a double whammy for lenders who are reeling from deteriorating net interest margins, according to Gbolahan Ologunro, equity research analyst at CSL Stockbrothers Limited.

“The central bank tilted towards a dovish stance when it reduced monetary policy rate (MPR) to 11.50 percent from 12.50 percent to stimulate economic growth,” Ologunro said.

Ologunro sees Open Market Operations (OMO) bills of around N2 trillion maturing by the fourth quarter of the year.
Lenders used to rack up purchase of local government bonds some three years ago when the country had one of the highest yields emerging markets.

That same period, OMOs used to trade in the double digit because the central bank tightened system liquidity in a view to curbing inflation and stabilising the economy.

However, average yields on Treasury bills that are sold at regular auctions have declined to 1.9 percent, following the decision of the central bank late last year to bar individuals and local non-banking firms from buying high-yielding central bank bonds.

The apex bank said the new policy would discourage lenders from giving loans to speculators who want to buy government securities instead of investing in the real economy.

At the recently concluded MPC meeting, the central bank governor, Godwin Emefiele, disclosed that the Loans to Deposit Ratio (LDR) policy was yielding fruits as the total credit to the economy rose to N19.33 trillion in August 2020 from N15.57 trillion in May 2019.

The big banks, awash with cash they can play with, have made money from the short-term government securities compared to the small lenders that have to conserve the cash to maintain capital buffers, as they are beset by rising non-performing loans.

For instance, the combined income from government debt of (FirstBank, Zenith Bank, UBA, Access Bank, GTBank) stood at N351.02 billion as at June 2020.

That compares with the N105.23 billion realised by the small and midsized banks such as Fidelity Bank, Union Bank, FCMB Group, Stanbic IBTC, Wema Bank, Unity Bank, and Sterling Bank.

Analysts have warned that the punitive environment that is created by the central bank could stoke non-performing loans (NPLs) and undermine profitability, as interest and non-interest incomes are already under pressure.

The NPL ratio of the Nigerian banking sector dropped to 6.6 percent at the end of April 2020 from 11 percent in April 2019, according to latest data from the apex bank.

The coronavirus pandemic that elicited government to impose lockdown measures paralysed business activities across the country and stoked rising bad loans as customers were not able to honour interest payment obligations.

Expectedly, the largest lenders saw combined impartment charge on financial assets surge by 111.94 percent to N119.06 billion in June 202o.That contributed to slow growth at the bottom line as combined net income increased by a mere 3.84 percent to N424.11 billion in the period under review.

“So far, unaudited six-month earnings for 2020 submitted to the Nigerian Stock Exchange (at least by FBNH and FCMB) point to pressure on interest income, lower interest expense, a spike in exchange rate translation gains and improvement in non-interest income,” noted analysts at United Capital Limited.