How Nigeria’s five big banks navigated regulatory fees in 2021

From afar, the Nigerian banking industry seems very competitive, but when the financial statements of each bank are examined, double figures running into millions separate them.

In return for their heavy investments, banks and shareholders expect to make a profit. From the audited and reported financials, the profitability of Nigerian banks is not in doubt.

Beyond profitability, there are also regulatory concerns.

Findings by BusinessDay showed lenders currently pay a charge of 0.5 percent of assets to the fund which is controlled by Assets Management Corporation of Nigeria (AMCON) and used to help pay down liabilities incurred from acquiring about 12,537 Non-Performing Loans (NPLs) worth N1.7 trillion from 22 financial institutions, following the 2009 banking crisis.

In the first nine months of 2021, Nigeria’s largest banks which include First Bank of Nigeria (FBN), United Bank of Nigeria (UBA), Guaranty Trust Holdings (GTCO), Access Bank, Zenith Bank, paid N175.03 billion as AMCON levy, 15.69 percent higher than N151.28 billion incurred the previous year, the highest in seven years.

“The effect of the levy, was on- and- off-balance sheet assets were charged, was such that big banks ended up paying significantly more overtime to clean up the banking system, which sounded fair at the time because the bigger banks stood to benefit more from having a safer banking system,” according to Adesoji Solanke, Director, Frontier and Sub-Saharan Africa (SSA) banks, Research analyst, Renaissance Capital.

“It was however appropriate to give the AMCON levy a finite life to avoid moral hazards and fiscal risks,” he added.

Since the AMCON levy is equal to 0.5 percent of total assets, banks are increasingly contributing a larger percentage of their income to the AMCON fund as total assets grow.

Ayo Ebo, Economist/Head, Research & Strategy, Greenwich Merchant Bank believes bank’s regulatory fees have outlived its usefulness and should be reviewed.

He said, “Although the AMCON levy is significant, it needs to be reviewed because the levy increases as the assets of banks grow which would impact their profitability.”

Because banks factor in regulatory costs when establishing the rate at which they will lend money to their customers, the regulatory cost leads to a higher lending rate.

According to Ebo, “Banks factor the statutory cost before determining the rate at which to give out loans. So, an increase in regulatory costs leads to an increase in lending.”

“Stopping the levy would mean a reduction in lending rates,” he added.

The largest Banks’ in the first nine months of 2021 incurred N645.99 billion as operating expenses, 14.28 percent higher than N753.62 billion incurred in the full year 2020.

Further analysis by BusinessDay shows that regulatory costs took a higher percentage of their operating expenses compared to the other expenses in the same segment.

The banks recorded a net profit margin of 161.11 percent in the first nine months of 2021 despite the increased regulatory fee incurred in that period. This is compared to the net profit margin of 134.71 recorded collectively in the full year 2020.

AMCON was set up by the Federal Government in 2010 with a 10-year mandate due to the rising bad loans and the need to save the banking industry from imminent collapse. However, it was amended in 2019 to end in 2023, to further enable banks to track debtors that are able but unwilling or refusing to pay amongst other additional benefits.

Banks already have to contend with other regulatory fees such as the Cash Reserve Ratio (CRR) which is a specified minimum fraction of the total deposits of customers that commercial banks have to hold as reserves either in cash or as deposits with the Central Bank of Nigeria (CBN). This was increased from 22.5 percent to 27.5 percent in January 2020, one of the highest in the world.

Solanke said, “We’ve seen significant lending to the Federal Government of Nigeria by the Central Bank of Nigeria, funded by Nigerian banks’ naira deposits taken via the CRR. Nigerian banks have probably the highest CRR in the world, and are operating under some of the most difficult regulatory conditions.”

Analysis by BusinessDay shows that in ascending order, FBN Holdings, followed by Access Bank, Zenith Bank, UBA, and GT Holdings Company are the tier-1 banks charged with the highest AMCON levy.

In the period under review, First Bank of Nigeria, one of Nigeria’s biggest banks, incurred the highest regulatory cost of N45.89 billion, 2.89 percent higher than N44.56 billion incurred in 2020. This is 35.41 percent of the Bank’s operating expenses totalling N129.57 billion.

The net profit margin is one of the efficiency ratios used to gauge an organisation’s efficiency. It is a financial ratio used to calculate the percentage of profit a company produces from its total revenue.

First Bank, in its first nine months of 2021, recorded a net profit margin of 9.55 percent compared to 17.06 percent recorded in 2020.

Read also: Here are banks that offer loans without collateral

Likewise, Access Bank incurred an increase in regulatory cost by 14.6 percent to N41.51 billion in the first nine months of 2021 compared to N35.44 billion incurred in the previous year. This cost sapped 21.98 percent of its operating expenses which totalled N188.89 billion.

The largest lending company by total assets recorded a profit margin of 17.59 percent in the first nine months of 2021-despite the increased AMCON levy-this is higher than 13.86 percent recorded in the full year 2020.

Zenith Bank, the most capitalised bank saw regulation fee increase by 18.38 percent to N37.92 billion in the nine months of 2021 from N30.95 billion last year. This is 27.69 percent of N136.95 billion incurred as operating expenses.

In the first nine months of 2021, the biggest bank by market capitalization recorded a net profit margin of 30.96 percent, compared to 33.11 percent recorded in the previous year.

United Bank for Africa (UBA), the pan African Bank saw an increase in regulatory cost by 20.28 percent to N27.82 billion compared to N23.13 billion in the previous year. Out of the N123.22 billion incurred as operating expenses, 22.58 billion was spent on regulatory costs.

UBA recorded a profit margin of 17.59 percent in the first nine months of 2021, higher than 13.86 percent recorded in 2020.

GTCO incurred an increase in regulatory cost by 27.27 percent to N21.89 billion in the period under review from N17.2 billion the previous year.

The second most capitalised bank spent 32 percent of its operating expenses, N67.36 billion on regulatory costs.

The Bank recorded a net profit margin of 72.57 percent, the highest amongst the other banks, compared to 44.25 percent recorded in the last year.

“So when you see any Nigerian bank delivering 20% return on equity despite CRR, low-interest rates and AMCON levy still in place, those returns could easily be 50% higher under somewhat normalised circumstances,” Solanke said.