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Investors left guessing as regulations squeeze banks’ profits

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Profits at Nigerian banks just recovering from a 2009 bad debt crises are seen as volatile in the medium term , leaving investors guessing on the 2014 outlook for lenders.

The Nigerian Stock Exchange (NSE) Banking Index gained 19.8 percent last year, under-performing a 47 percent gain for the wider NSE All Share Index, according to data from the bourse.

As regulations rise, profits are falling across all tiers of lenders, from First Bank, the largest lender by assets, to Skye Bank a mid-tier lender.

The 14 commercial banks which have released earnings for the nine month period to September 2013 grew pretax profits by 6.5 percent to N458.9 billion, the slowest pace of growth in about two years.

For banks to reverse the anemic growth in profitability and boost stock performance however, they would have to ramp up lending while keeping bad loans from ballooning.

It’s a tight rope to walk, notes Samira Mensah associate director, Financial Institutions ratings at Standard & Poor’s.

She projects that the industry may see credit issues emerge fairly quickly, when loans mature in about two years.

“This is as a result of the short credit cycle and volatility in asset quality ,” Mensah said.

“As banks start lending again to risky levels, some banks may lend beyond their ability,” she said.

While lending should expand together with the Nigerian economy, credit growth lagged nominal GDP in 2013.

Data from the CBN show that borrowing by companies in the private sector rose by 9.7 percent to N16.45 trillion in November, from N14.99 trillion in January 2013, less than last year’s projected nominal growth (GDP plus inflation) of about 14 percent.

Private sector credit in Nigeria was equivalent to 38 percent of GDP in 2013, compared to 150 percent of GDP in South Africa.

Nigerian businesses said access to financing was the third most problematic factor for doing business in Nigeria after infrastructure and corruption, according to the World Economic Forum, global competitiveness report for 2013, meaning credit demand is not being matched by supply, as lenders largely remained risk averse.

For investors wondering which banks to buy into or sell, an analysis of Renaissance Capital’s rated lenders in their report of November 13 shows that First Bank has the most upside potential of 4.21 percent with target (TP) of N20.5 and closing price of N16.29 (Jan.3, 2014), while Diamond Bank has the least upside with TP of N7 and actual price of N7.58 per share.

“We could sum up 2013 as the year of regulatory headwinds in the Nigerian banking sector,” said research analysts Nothando Ndebele and Adesoji Solanke of Renaissance Capital.

“We welcome measures to increase the viability and stability of the banking sector, but we believe some are unnecessarily punitive and make it harder for banks to deliver value-creating returns.”

A regulator-mandated rise in the interest rate paid on savings deposits cost First Bank N5 billion in the nine months through September, while a reduction in commission on sales led to a drop of about N10 billion, First Bank Nigeria Chief Executive Officer, Bisi Onasanya said in an interview last week.

Pretax profits for the lender fell by 7.4 percent to N70.07 billion in the nine months through September from N75.68 billion in the previous year, while profit for 2013 will probably be the same as the previous year as tougher regulatory requirements increased its costs, Onasanya said.

The possibility of a hike in cash reserve requirements (CRR) on private sector deposits, up to 20 percent, and on government deposits, up to 75 percent may further cost banks about 30 percent of their profits in 2014, according to Bismarck Rewane, economist and chief executive of research firm Financial Derivatives Company (FDC).

The IMF estimates that a 2 percent increase in the level of the CRR adds approximately 0.5 percent to the spread between deposit and lending rates.

Some analysts have criticised the CBN’s justification of continued tight monetary policy stance on the government’s fiscal expansion policy.

“Nigeria is inadvertently enduring a super tight fiscal policy regime, which the Central Bank of Nigeria had incidentally quite erroneously repeatedly portrayed as ‘expansionary’ (based on reading nominal budget figures in isolation of nominal GDP) and used to justify the imposition of a tight monetary policy regime in the last three years,” says Ayo Teriba, economist, in a published article of Wednesday, January 1, 2014. “The combination of the inadvertently tight fiscal policy and tight monetary policy will most likely undermine growth, diversification and employment.”

By: JOHN OMACHONU & PATRICK ATUANYA