A drop in yields on short-term security in the second quarter of 2019 after a successful election could threaten banks’ profit, but cost savings and investment in retail business could see them surmount the headwinds.
“So far, lenders have not been giving out so many loans; instead they have been packing money in government securities,” said Wale Olusi, equity research analyst with United Capital Ltd.
“And once the elections uncertainties are over, the Central Bank of Nigeria (CBN) may consider lower interest rate. And when that happens, yields will crash and that could lead to weaker earnings. You don’t expect them to make money as they did last year,” said Olusi.
Banks’ profit has been growing at a slow pace since the second quarter of last year as interest income and similar charges continue because steep inflation, a lack of foreign exchange and high levels of unpaid loans are also weighing on their risk appetite.
Yields on one-year Treasury bills (T-bills) are at 17.6 percent, but still lower than the 22 percent they traded in 2018.
But analysts at CSL Stock Brokers are of the view that banks will continue to make money even if yields on government instruments remain at above 10 percent. They believe such could mean that banking sector lending to the real sector will remain subdued for a long time.
Banking sector credit to the economy declined 2.9 percent quarter on quarter (q/q) from N15.6 trillion in the third quarter of (Q3) 2018 to N15.1 trillion in the fourth quarter, according to data from the Nigerian Bureau of Statistics’ (NBS) banking sector report. On a 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.
A recent data compiled by Bloomberg showed Nigeria’s naira bonds have returned 6 percent and are second best-performing local debt in the emerging markets for the month of February.
Yields might have been driven by the postponement of elections, albeit stocks and bonds were hammered since President Muhammadu Buhari was re-elected for a second term.
The CBN is expected to intensify on its Open Market Operation (OMO) as it seeks to mop up excess liquidity in the system. The apex bank on Thursday resumed its OMO auction, selling a total of N1.075.85 trillion to investors for an offer of N400 billion.
Inflation for the month of January stood at 11.37 percent, an improvement from 11.47 percent in December 2017.
Longer-dated OMO bills may rise to as high as 23 percent if higher US interest rates cause outflows from Nigeria, according to Lagos-based Chapel Hill Denham Securities Limited.
Perhaps more worrisome is that only the big banks will benefit from a high-yield environment while the small lenders, beset by deteriorating asset quality and capital buffers, may be left out.
Analysts across the broad spectrum have agreed that banks may not see strong growth in their full return on equity (ROE) as they saw last year because 2017 was a year that the combination of the new foreign exchange policy and a rebound in crude oil price and output eased the flow of FX supply.
Also, the introduction of the International Financial Reporting Standard (IFRS) 9 resulted in a reduction in shareholders’ fund as most banks have taken the impairment through the balance sheet.
“We may see single digit in their ROEs and for some of them it could be flat. This means they may have to cut costs,” said Ayodeji Ebo, managing director/CEO, Afrinvest Securities Ltd.
“We don’t expect to see improvement in interest income on loans and advances because they were unable to lend,” said Ebo.
BALA AUGIE
