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Nigerian banks’ profits to drop in 2015, says Fitch

Nigerian banks’ asset growth and earnings will fall in the next 18 months because of the central bank’s (CBN) moves to protect the economy and banking customers, Fitch Ratings Ltd says in a report.

“All these moves led to weaker profitability and stemmed credit growth” in the first half of 2014, Fitch says in the report published yesterday (Oct 08) in London. This is likely to continue into 2015, it says.

The CBN increased cash reserve requirements (CRR) on public sector deposits to 75 percent from 12 percent since July last year to curb inflation, and limited how much banks can charge account holders when they withdraw money.

The Asset Management Corporation of Nigeria (AMCON), a state company created to buy bad debt from lenders after the country’s 2009 financial crisis, also last year raised its annual levy on banks to 0.5 percent of their assets, from 0.3 percent.

Nigerian banks’ ability to create risk assets is also being squeezed by CBN regulations on capital requirements.

Bisi Onasanya, group managing director and chief executive officer, First Bank of Nigeria, says a balance must be struck between fiscal and monetary policies against the current obsession with fighting inflation.

“The introduction of Basel II means that every N1 of loan you create, you have to provide capital to cover it. There are now only 45-55 percent of deposits available for lending,” Onasanya said at a conference in Lagos last month.

“We want policies that will create employment and we must not fixate on exchange rates. Whatever you sterilise you make unavailable for lending,” he said.

Onasanya says the CBN’s CRR policy has effectively kept N460 billion of First Bank’s funds at the apex bank earning zero interest rates, instead of being available for lending.

fitch-ratings

Total bank credit extended to the private sector was equivalent to N17.39 trillion or only 21.6 percent of GDP as at August 2014, according to data from the CBN website.

Nigerian lenders have recovered from the home-grown financial crisis of 2009 and are generally better positioned today compared to four years ago, after the establishment of AMCON to buy bad loans. Non-performing loans (NPLs) have fallen from a high of 35 percent to about 4 percent today.

However, banks are still perceived as averse to lending and more willing to invest in government’s fixed income securities at yields in upwards of 12 percent.

The CBN has justified its tight money policy on the need to maintain monetary stability and protect the naira.

Consumer prices in Nigeria have dropped from a high of 13 percent in 2009 to 8.5 percent in August 2014, while the naira has outperformed other African peers such as South African rand and Ghanaian cedi in the same period.

Implementation of Basel II and capital adequacy ratio will also pare bank stock prices, says Bismarck Rewane, CEO of Financial Derivatives Company (FDC) Limited, in an October 2 presentation.

The report, however, observes that despite the monetary headwinds, the banks are currently performing well, with the agency rating nine of them on the international scale, with six of them having Long-Term issuer default rating (IDRs) driven by potential state support.

The banks are First Bank of Nigeria, United Bank for Africa, Diamond Bank, Union Bank, Fidelity Bank and First City Monument Bank.

It also notes the willingness of the regulatory authorities to support domestic banks, which has continued to be on the increase.

Three banks – Zenith Bank, Guaranty Trust Bank and Access Bank – have IDRs driven by their intrinsic strengths as defined by the Viability Rating (VR). All Nigerian banks have VRs in the ‘b’ range, mainly due to the high influence of the operating environment on their ratings.

Patrick Atuanya & Josephine Okojie, with agency reports