Four midsize banks’ earnings surge 156% on CBN’s rate hike

The earnings of four tier-2 banks surged by 156 percent in the first half of 2024 compared to a year earlier, an analysis by BusinessDay shows.

According to the latest financial statements of the firms, their combined after-tax profit rose to N413 billion in H1 from N161.7 billion in the same period of last year.

The lenders, which are listed on the Nigerian Exchange Limited are Ecobank Transnational Incorporated, Wema Bank Plc, FCMB Group Plc, and Sterling Financial Holdings Company Plc.

Analysts say their profit growth was driven by a significant increase in interest income, driven by effective asset repricing in response to the elevated interest rate environment.

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Interest income or revenues are payments that the bank receives from its interest-bearing assets.

“The increase in interest income was the major driver for most of the banks’ profit. If you check their loan books for 2023, it expanded significantly, also year to date we are seeing very significant expansion in loan books,” Olumide Sole, sub-saharan banking research analyst at Vetiva Capital Management, said.

He said the drivers of the loan book expansion are more of translation not because banks are giving out loans and that the loans especially the foreign ones will continue to expand as the naira depreciates.

“The expansion of foreign loans is enough to record a significant growth. Banks are not giving out loans because of the economic situation. They are very conservative so they are giving to only cash generative businesses,” he added.

Further analysis of the statements revealed that the banks’ total interest income was N1.7 trillion in H1, up from N742 billion while loans and advances to customers grew by 68.4 percent to N18.7 trillion from N11.1 trillion.

“The banks’ main business is lending and for them to lend money out they charge a fee which is the interest funds they give. A hike in interest rate can result in a repricing of the asset. Lending is their core business, but they have to reprice their asset, which will continue if interest rates remain high,” Nabila Mohammed, investment analyst at Chapel Hill Denham, said.

She said the banks are enjoying both loans and investment securities because yields in the market are attractive for entry-level and that it was clear at the beginning of the year that the CBN would hike interest rates.

“But the winners will be those that can manage their interest expenses well because the banks can’t be repricing their assets and not rewarding their depositors. The banks should be able to manage their cost of funds by making sure that they have a low-cost deposit mix.”

The CBN in July raised its monetary policy rate for the fourth straight time by 800 basis points to 26.75 percent in a bid to fight inflation. In May, the CBN increased the interest rate by 150 basis points to 24.75 percent.

Apart from the MPR hike, the liberalisation of the foreign exchange regime in June weakened the naira from N463.38/$ to N1, 586.1/$ as of August 22, 2024. At the parallel market, the naira is being traded at around N1,605/$ as against 762/$ before the FX reform.

Read also: Nigerian businesses expect naira to depreciate in short term – CBN

A breakdown of the statements revealed that Ecobank reported the highest profit growth of 172.1 percent, followed by Wema Bank with 92.1 percent. FCMB Group had 80.5 percent, and Sterling Holdco recorded 59.2 percent.

Analysis of individual firms

Ecobank

Ecobank’s interest income rose by 175 percent to N1.2 trillion from N445 billion.

The bank’s after-tax profit rose by 196 percent to N311 billion from N105 billion while interest expense rose to N253.3 billion from N103.4 billion.

Jeremy Awori, CEO of Ecobank Group, in a statement, said: “Our half-year results demonstrate the strength of our diversified business model. Despite facing macroeconomic challenges in some of our operating markets.”

“Our transformation agenda remains our top priority, with a focus on improving customer experience and driving efficiency and productivity. Despite persistent inflation, we achieved an efficiency ratio of 53.6 percent,” he said.

FCMB Group

FCMB’s interest income increased to N149 billion, up from N269 billion.

The group’s after-tax profit rose by 67.7 percent to N59.4 billion from N35.4 billion while its interest expense rose to N96.7 billion from N55.1 billion.

Analysts at FBNQuest in a recent note said the group’s profit of N59 billion implies a return on average equity of 23.9 percent.

“In Q2, pre-provision profit declined by nine percent year-on-year, primarily because of a 30 percent year-on-year decrease in non-interest income, and an 82 percent year-on-year reduction in credit loss impairments contributed significantly to the year-on-year earnings growth. In contrast to the decline in non-interest income, funding income increased by 25 percent year-on-year, benefiting from higher net interest margins due to improved asset yields from the elevated interest rate environment.

Read also: Nigerian firms have bleak short term naira outlook, CBN survey shows

“However, recent regulatory pronouncements related to the FX windfall tax to be paid by Nigerian banks may mute the market’s reaction”, the note added.

The group is a financial services institution offering products and services for the commercial, corporate, and institutional sectors in Nigeria and Europe. The company’s core portfolio is focused on investment banking, asset management, commercial banking, corporate banking, personal banking, institutional banking, and treasury and financial markets.

Wema Bank

Wema Bank’s interest income rose to N146 billion from N76 billion.

The bank’s after-tax profit increased to N26.5 billion from N10.4 billion while interest expense rose to N43.8 billion from N37.1 billion.

The Bank is a Nigeria-based bank that offers retail banking, small and medium-sized enterprise banking, corporate banking, treasury, trade and financial advisory services.

Its segments include South-West, South-South, Abuja, and Lagos zones. Its business solutions include corporate banking, trade services, and e-banking. Its investments and loans include overdrafts, term loans, import finance facilities, finance lease facilities, and agricultural finance.

Sterling Holdco

Sterling Holdco recorded a 52.8 percent growth in after-tax profit to N16.2 billion, up from N10.6 billion. The holding company’s interest income grew to N121 billion from N76 billion.

Its interest expense also rose by N63.2 billion from N31.6 billion in the period under review.

The holding company has two primary subsidiaries such as Sterling Bank Plc, which offers commercial banking services, and Alternative Bank Limited, which operates as a non-Interest Banking business.