Nigerian banks could see the biggest yearly decline in revenues since 2016 by the end of this year, according estimates by a senior official at Fitch Ratings which point to at least a 20 percent dip.
“Banks are dealing with slow growth, fall in lending, a lack of forex in the market and asset quality issues,” said Mahin Dissanayake, senior director, EMEA bank ratings, at Fitch.
Though Dissanayake expects banks’ revenues to drop at least 20 percent this year, he did not expect any to make a loss.
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 currency is also squeezing 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% to 27.5% 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%.
A report by Lagos-based credit ratings firm, Agusto & Co, also noted that Nigerian banks’ earnings and profitability are 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,” said Bode Agusto, the firm’s chief executive officer.
“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 said.
Whether it’s 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 Business Day.
“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,” said Nkemdilim Nwadialor at Tellimer Capital.
Those debits also hamper wider lending, going against central bank measures of lowering banks’ loan to deposit ratios, she said. Central bank data showed credit to the private sector in April dropped by nearly two-thirds from end-2019.
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 ₦1.9 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.
