Nigeria’s problem with leverage is the exact opposite of what emerging markets usually face. There’s too little debt in the banking system, and too much equity.
The average financial leverage- which simply divides assets by equity, – for 13 largest banks that have released third quarter results-is 6.18 times.
That compares with South Africa; 12.60, Brazil; 11.20, Malaysia; 10.70, Singapore; 11.30, Hong Kong; 11.70 and China; 15.30.
The country’s lenders are holding too much equity, which they can get away with because they earn exorbitant net interest margins to meet investors’ return expectations. That hurts both savers and borrowers.
Banks benefit from the spread between the risk free rate (Treasury Bills) and interest on deposits, unlike their counterpart in South Africa, Europe, Asia, and the United States that operate in largely low risk environments.
Johnson Chukwu, CEO and managing director of Cowry Asset Management Ltd said the economy is not as structured as emerging and advanced markets where customers have excellent credit history.
For instance U.S banks will not lend to customers that have history of bad loans.
Of course Nigerian banks have been stung in the past, as they are still grappling with Non-Performing Loans (NPLs) and impairment on financial assets brought on by the sudden drop in crude oil prices of mid-2014 that helped throw the economy into recession.
“Net interest Margin is tiny in most advanced countries and you need to ensure that the spread can cover operating cost. To ensure the spread covers cost, you have to create loans. Difference between Treasury Bills (T-bills) and deposit is small; hence you cannot set up a bank in developed economies to trade on T-Bills,” Wale Okunrinboye, Head of research Sigma pensions told BusinessDay on phone.
“For Ivorian banks’ leverage is high because interest rates and inflation rates are lower. If interest rates are lower you have to take on more risks to survive,” Okunrinboye said.
Indeed the country’s macro environment is fraught with risk as economy has been growing sluggishly since the start of last year and inflation remains in double digits.
The economy grew by 1.80 in the third quarter of 2018, lower than 1.95 percent and 2.10 percent in the first and fourth quarter of 2018 and 2017.
Kayode Tinuoye, Fund Manager at United Capital Asset Management Ltd, is of the view that Nigerian banks are financed by deposits, and that most of the capital in the country are Tier 1 and not Tier 2, which is why they do not have the capacity to fund longer term projects because their funding is short term.
“That is why most of them issue Eurobonds to fund long term projects just to match assets with liability,” said Tinuoye.
Nigerian banks have some $1.3 billion out of a total of $3.72 billion in outstanding Euro bonds due next year and a rising global interest rate environment expected for the period may lead to higher refinancing costs.
A breakdown of financial leverage shows Zenith Banks assets to equity ratio increased to 7.22 times in September 2018 from 6.68 times the previous year.
Guaranty Trust Bank (GTBank) Plc’s leverage ratio moved to 6.42 times in the period under review from 5.36 times the previous year.
Access Bank’s leverage increased to 9.63 times in September 2018 from 7.95 times the previous year.
First Bank’s holdings’ asset to equity ratio rose to 7.68 times in the period under review, this compares with 7.72 times recorded the previous year.
United Banks for Africa (UBA)’s leverage ratio increased to 7.84 times in the period under review as against 6.68 times the previous year.
Stanbic IBTC Holdings’ leverage ratio increased to 7.04 times in the period under review from 7.48 times the previous year.
Fidelity Banks’ leverage ratio moved to 8.73 times in September 2018 as against September 2017.
First City Monumental Bank (FCMB)’s asset to equity increased to 7.23 times in the period under review compared to 6.27 times the previous year.
Unity Bank has a negative ratio of -1.04 times in the period under review from 5.27 times the previous as the lender recorded negative shareholders’ fund of N242.30 billion.
BALA AUGIE
