The sudden slump in banks’ interest income should send a predawn chill down the spine of investors as the continued drop in yields and waning foreign exchange gains could deal a great blow on future earnings.
Custom street bankers have been labelled the indigenous or smart guys because they were able to take advantage of regulators monetary policy.
First, the devaluation of the currency in 2014 and 2016 was a boon for operators, as it balloon dollar denominated assets, therefore, underpinning earnings.
Second, the high yield on short term government security in 2017 saw lenders make money from income on treasury bills, and again, profit spiked.
Little wonder shareholders were rewarded with jumbo dividend while directors drank from wine poured from a flagon into a golden goblet even amid economic downturn.
The introduction of the Investors’ and Exporters’ window in April 2017 eased liquidity in the foreign exchange market, and lenders were able to access foreign currency.
The cumulative interest income of 10 banks that have released half year results fell increased by 2.67 percent to N1.31 trillion, from N1.27 trillion the previous year, this compares with a 25.115 percent increase in the 2017 and 2016 financial period.
Experts are of the view that banking isn’t charity business adding that lenders are in business to make money for shareholder in so far as it is legitimate.
“Why should they lend to a risk sector while they can invest in risk free securities,” said an analysts who didn’t want his mentioned.
The anonymous analyst has opened another chapter: Why have banks refused to turn on the tap on lending despite government Treasury bill redemption.
Despite the redemption of treasury bills by the Federal Government that resulted in enhanced liquidity, banks have refused to turn on the tap on lending to the private sector as loan books continue to shrink.
This means they are unconvinced that the risk level is not low enough for them to start lending.
“I think this is not unique to Nigeria alone where authorities want banks to lend as much they want. In United States and the United Kingdom (UK), authorities find other ways to encourage them to lend more,” said Olubunmi Asaolu, Head of Equity Research at FBNQuest Capital.
“No bank has decided to turn on the taps as they feel the risk level is not low enough for them to worry about lending,” said Asaolu.
Between December 2017 and June 2018, Federal Government redeemed N840 billion worth of Treasury Bills, a strategy that has resulted in reducing the yields on bench mark government securities to 11 percent and 14 percent in the first half of 2018 from 18.50 percent to 22 percent in January.
The cumulative total loans and advances to customers for the seven banks that have released half year results were down 7.88 percent to N7.43 trillion in June 2018 from N8.07 trillion the previous year, according to data compiled by BusinessDay.
Drilling down into the numbers shows GTBank’s total loans and advances to customers reduced by 10.41 percent to N1.291 trillion in June 2018 from N1.44 trillion as at June 2017.
Zenith Bank’s loans and advances to customers dipped by 10.95 percent to N1.87 trillion in the period under review from N2.10 trillion as at June 2017.
First Bank’s loans and advances to customers reduced by 7.50 percent to N1.85 trillion in June 2018 from N2 trillion as at June 2017.
Union Bank’s total loans and advances to customers reduced by 9.07 percent to N470.15 percent billion in the period under review as against N517.15 billion the previous year.
There has also been consistent marginal decline in the Federal Government (FGN) Domestic Debt to N12.58 trillion in March 2017 and N12.15 trillion in June 2018 from N12.59 trillion December 2017, according to a recent report by the Debt Management Office (DMO).
It will be recalled that the country raised $3 billion in a two-part international bond sale with a view to funding a fiscal deficit and reducing its local-currency debt burden.
The low interest rate environment means it is end of free money for banks as income from treasury bills are expected to shrink, with possible negative repercussions on future margins.
Analysts at CSL Stock Brokers said the recent issuance of commercial papers by corporates may suggest that commercial banks are still not compelled to channel credit to the private sector, while corporates are taking advantage of lower yields from commercial papers.
“We envisage that the issuance of commercial papers will continue to gain traction over the course of the second half of the year, more so that the prospect of a rate cut and an attendant reduction in banks’ loan rates is becoming elusive,” said analysts at CSL Stock Brokers.
