Nigerian banks could see the biggest yearly decline in revenues since 2016 by the end of this year, according to estimates by Renaissance Capital and Fitch Ratings, which point to at least a 20-percent dip.
“Banks are dealing with slow growth, fall in lending, a lack of foreign exchange in the market and asset quality issues,” Mahin Dissanayake, senior director, EMEA bank ratings at Fitch, says.
Though Dissanayake expects banks’ revenues to drop at least 20 percent this year, but does not expect any to make a loss. Renaissance Capital also expects a similar decline in bank profits this year.
“We currently expect 2020 before tax earnings for the top six banks to decline by a quarter on average, year-on-year,” notes Adesoji Solanke, an analyst at Renaissance Capital.
“A decline in Profit Before Tax (PBT) by over 20 percent will be the most severe in the past five years,” Solanke says in an email.
The movement in commercial bank lending rates is a factor of profitability, as interest rates tend to rise when profitability is constrained and vice versa. This implies that if banks record lower profits this year it could lead to a hike in interest rates or overall slowdown in lending, which would affect access to credit for businesses and individuals.
Banks have been on the receiving end of an economy tipped by the International Monetary Fund (IMF) to contract by 5.4 percent this year, the most since 1987.
Central bank measures to support the naira have however worsened the burden on lenders already hit by the negative fallout from COVID-19 pandemic and the oil price shock.
The central bank has pulled as much as N900 billion out of the local banking system since raising the cash reserve ratio (CRR) by 5 percent to 27.5 percent in January, according to analysts’ calculations.
Bankers say the effective CRR rate is closer to 60 percent and that the CBN now sits on around N10.4 trillion of bank deposits earning zero interest in CRR.
The CRR rate, which is among the highest in the world, means banks have to work harder to turn a profit in an economy that looks out of sorts and is set for its biggest contraction in over three decades.
Some banks have already indicated they expect a hit to their revenues this year. In April, mid-tier lender Fidelity Bank warned 2020 profits would drop by 15 percent.
A report by Lagos-based credit ratings firm, Agusto & Co, also noted that Nigerian banks’ earnings and profitability were expected to decline drastically in 2020.
“In specific terms, banks’ earnings from their core business are projected to decline in the short term due to an expected rise in impairment charges and lower yields on their loan books,” notes Bode Agusto, the firm’s CEO.
“More so, the contractionary monetary policy stance, exacerbated by discretionary Cash Reserve Requirement (CRR) debits by the CBN, is expected to affect banks’ overall performance this year,” Agusto says.
Whether it is on account of implementing its CRR rule or punishing banks for not lending at least 65 percent of their deposits to small businesses, the CBN has debited banks to the tune of N2.1 trillion in 2020 alone, according to data tracked by BusinessDay.
The general sentiment in the markets is that CRR debits are carried out quite close to FX auctions to prevent the banks from presenting large ticket FX demands at auctions.
Those debits however hamper wider lending, going against central bank measures of lowering banks’ loan to deposit ratios. Central bank data showed credit to the private sector in April dropped by nearly two-thirds from end-2019.
Faced by lower oil prices and a 19-percent decline in its foreign currency reserves this year, the CBN has dusted its play book from 2016 by trying to suppress demand for FX to conserve its thinning reserves and protect the naira from depreciating sharply against the dollar.
Critics say the strategy failed in 2016, as it worsened an already acute dollar shortage, which contributed in tipping the economy into recession, and led to eventual naira devaluation.
The downsides of micro-managing the FX market have not deterred the CBN from towing the same path this year.
The lack of liquidity at the official market has pushed demand to the black market, which has widened the gap between the rates in both markets to a record N80/$.
While the official rate is around N380/$, the black market rate is much weaker at N460/$.
The dollar shortages have taken a significant toll on banks, which announced plans to reduce the amount customers can spend abroad using debit cards last week, as lenders try to limit foreign currency settlement risk.
One of the banks planning the move, Zenith Bank, says it will temporarily suspend the use of debit cards abroad for cash withdrawals and cut the monthly spending limit abroad by more than half to $200.
The tier-one bank notes that “the review is in response to today’s economic realities” in a notice, advising clients to request prepaid dollar cards.
“Many Nigerian banks cannot open Letters of Credit (LC)s and companies have no access to foreign currency,” a source familiar with the matter says.
“There appears to be attempt to suppress demand for FX; we are headed for the rocks,” the source states.
Bankers say the dollar crunch means it now takes more than six months to settle foreign lines of credit.
Fitch also predicts impaired loan ratios will rise sharply in 2020, with Nigerian banks the most exposed to stress in the oil sector compared to their peers in emerging markets elsewhere.
Commercial banks have written off N1.9 trillion bad loans from their books in the last four years, according to data by Agusto & Co. As at June 2020, they had written off N1.3 trillion in bad loans.
