A 15 percent surge in profits for the five largest banks in the most recent quarter (Q2), has not been enough to pique investor interest as financials continue to under-perform the broad market.
Banks in Africa’s largest economy are still able to remain profitable amid a tough and unpredictable environment, with the top five firms raking in N339.50 billion in quarterly earnings for the first time.
However, the analysis, based on the half year results of lenders show that there could have been slow growth at the bottom line, save for the strong contribution of Access Bank, a company that merged its operations with Diamond Bank.
A five year trend analysis of the five largest banks – Zenith Bank, FirstBank Holdings, Guaranty Trust Bank, United Bank for Africa (UBA), and Access Bank- showed that cumulative after tax profits increased by 15.13 percent to N339.50 billion in the second quarter of 2019, compared with N294.25 billion in 2018, N270.28 billion in 2017, N203.86 billion in 2016, and N200.53 billion in 2015.
Meanwhile Zenith Bank stock has returned -21.91 percent year to date, FirstBank Holdings -45.28 percent, Guaranty Trust Bank -24.09 percent, UBA -20.78 percent and Access Bank +1.47 percent.
The benchmark stock market NSE all share index returned -13.63 percent for the period, while the banking index has returned -19.33 percent.
In 2017, banks capitalized on a high yield environment as they parked funds in risk free government securities, a strategy that added impetus to net interest margin. That year, government embarked on aggressive sale of treasury bills with a view to curbing inflation and funding a budget deficit. Yields on Treasury Bills hovered between 18 percent and 22 percent.
However, banks are feeling the pains of a drop in yields since the start of 2018, signalling the end of free money and a harsh regulatory environment casting a pall on investors view on future earnings. Today, yields are between 13.12 percent and 14.12 percent.
“The current results may not be an apples to apples comparison of the results because the Access Bank of last year is different from this year,” said Ayodele Akinwunmi, analyst at FSDH Merchant Bank Limited.
“The outlook for next year may not be as good as this year as we have seen we have seen that interest rates have gone down. Also, we can also see where the external reserve is. The economic fundamentals aren’t encouraging” said Akinwumi.
The Nigerian economy has been growing sluggishly since the country exited a recession, as inflationary pressure, devaluation of the currency, and hike in the price of fuel continues to squeeze consumers.
High overhead costs, decrepit infrastructure, and cost of doing business makes it difficult for companies to honour obligations to banks.
The country’s gross domestic product expanded 1.94 percent in the three months through June from a year earlier, according to a recent data from National Bureau of Statistics (NBS). That compares with a revised expansion of 2.1 percent year on year and 2.38 percent in the first quarter (Q1) and the fourth quarter (Q4) of 2018.
Analysts say the decision of the central bank mandating banks to increase their loans to deposit ratio to 60 percent in order to spur lending to the real sector of the economy could balloon banks’ non-performing Loans (NPLs).
“We expect these measures to negatively impact banks’ asset quality as loans to the target sectors will likely be of lower asset quality relative to traditional higher quality corporate loans,” said Ronke Akinsola, equity research at Chapel Hill Denham Limited.
“Thus, we could see higher cost of risk and NPL ratios on the back of the new measures amid tighter risk framework by the banks. Considering the CBN’s intended quarterly review of these measures, we expect stronger pressure on banks if the LDR is raised to 80 percent upwards subsequently,” said Akinsola.
Further analysis of the financial statement of the largest banks show First Bank’s profit fell by 5.37 percent to N31.71 billion as at June 2019, GTbank’s net income increased by 3.71 percent to N99.13 billion as at June 2019, Zenith Bank’s net income was up 8.70 percent as at June 2019, while Access Banks profits surged by 59 percent to N63 billion.
BALA AUGIE
