The divide between the haves and the have-nots among Nigerian banks is widening.
The country’s biggest banks awash with cash and a strong balance sheet have generated more revenue as they are more successful at investing their funds in comparison with expenses in a difficult environment.
On the other side of the scale, smaller lenders, reeling from exposure from the oil and gas sector, lacked the capacity to invest in short-term government securities when yields were higher.
The cost of funds is also a major factor in boosting profits.
Tier-one lenders have a lower cost of funds because they attract deposits at lower rates relative to smaller banks, according to Ayodeji Ebo, managing director/CEO, Afrinvest Securities Limited.
Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits) relative to the amount of their interest-earning assets.
A high net interest margin indicates an entity invests its funds efficiently, while a lower return implies the bank or investment firm doesn’t invest efficiently.
As at June 2019, Guaranty Trust Bank plc, the largest lender by market capitalization, has a net interest margin of 8.60 percent, First Bank Holdings (FBHN) 7.50 percent, Access Bank 7.60 percent, and Zenith Bank 6.70 percent.
By contrast, smaller lenders like Fidelity, Stanbic IBTC, Wema, and Sterling Bank have NIM of 4.60 percent, 6.0 percent, 6.10 percent, and 6.20 percent, respectively.
The bigger banks have a larger balance sheet size and assets that translate into higher interest income from those assets, according to Yinka Ademowagun, an equity research analyst at United Capital.
“Big banks do not borrow much and they invest in government securities, which are risk-free compared to loans that you have to take some impairments on,” said Ademowagun.
This means the inequality among lenders in Africa’s largest economy is increasing.
The five largest lenders (FBNH, GTB, UBA, Zenith and Access) raked in N1.03 trillion in interest income as at June 2019, which compares with N368 billion combined interest income of the rest of the smaller banks, according to data compiled by BusinessDay.
Similarly, the five big lenders have combined total assets of N26.15 trillion as of June 2019, which compares with the N8.16 trillion in total assets of the smaller lenders.
Net interest income of Nigerian banks – revenue from customers’ loans payments and investment returns minus what banks pay depositors – has been growing at a slow pace since the start of 2018, when yields on treasury bills began to fall.
In 2017, banks’ traditional lending businesses profited from a high-interest rate environment as they made money from investment securities such as bonds and treasury yields.
That same year, Treasury yields hovered between 18 percent and 22 percent, but now it hovers between 13 and 14 percent.
While the lenders’ combined net interest income increased by 16.01 percent to N862.78 billion in June 2019, it is lower than the N981.39 billion generated in 2017.
Analysts say net interest margin for Nigerian banks will continue to deteriorate through the year, but they added that the narrative will change next year since a lot of lenders are investing in the retail end of the market.
“When you look at the performance of banks, you will see that they are feeling the pains of a low yield environment and as such net interest margins may continue to suffer,” said Ayorinde
Akinloye, equity research analyst at CSL Research Limited.
Unlike in Europe, Asia, and the United States where net interest income is susceptible to central banks’ tampering of interest rates, net interest income of Nigerian lenders often does not react to movement in the policy rate.
Nigeria’s central bank kept its monetary policy rate at 13.5 percent at its last meeting as nine of its 11 monetary policy committee members decided this would allow time to better understand the momentum of domestic economic growth amid the declining trend in global output and persistent uncertainties.
“The banks are likely to reduce their lending rates, which may not be in line with a reduction in deposit rates, and this may lead to decline in NIM,” said Johnson Chukwu, managing director and CEO, Cowry Asset Management Limited.
