• Friday, March 29, 2024
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Will banks see improved ROE in 2018?

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Banks in Africa’s largest economy are expected to see a drop in full year 2018 return on equity because the fundamentals that helped propel portability the previous year has waned.

But the big lenders will continue to make money since government will continue to borrow to fund capital project and mop up excess liquidity from the system.

In 2017, Banks’ bottom line got a boost from interest income from treasury bills when yields were at all time high and the introduction of a flexible exchange rate system by the Central Bank of Nigeria (CBN) that eased dollar scarcity was a boon for them.

Guaranty Trust Bank Plc recorded return on equity (ROE) of 30.17 percent in December 2017, the highest figure since 2015 when the figure stood at 25.55 percent. The lenders’ profit has been rising steadily since 2013, but the growth was slow in between 2015-16.

Zenith Bank Nigeria Plc has been using shareholder equity in generating higher profit in the last three years as ROE stood at 22.32 percent in December 2017, this compares with 18.42 percent recorded in 2015.

First Bank Holdings Plc’ ROE increased to 6.35 percent in December 2017 as against 2.11 percent in December 2016, albeit lower than the 16.67 percent recorded as at December 2014, before bad loans started showing in its books.

Stanbic IBTC Holdings Plc’s ROE jumped to 29.68 percent in December 2017 as against 21.14 percent as at December 2016, but the fastest jump was recorded in 2015-16 financial year.

“We shouldn’t expect marked improvement in returns in 2018 because lenders were coming from a low base the previous year, and, also, 2017 wasn’t that bad a year,” said Gloral Fadipe, head of equity research at CSL Stock Brokers Ltd.

In 2014, banks were expected to take advantage of a rising population, growing middle, and a benign economic conditions, but the precipitous drop in crude price soured such dreams because customers were unable to pay back interest on money borrowed, hence, resulting in huge bad loans.

But the big players were able to weather the storm because they have strong capital buffers compared to the smaller players.

“We would see single digit ROE for most of them and it would be flat for some,” said Ayodeji Ebo, managing director/CEO of Afrivest Securities Ltd.

There has been improvement in asset quality since the country existed the recession in 2016, but credit to the real economy has been ebbing as lenders are cautious of lending to risky sectors.

Non-Performing Loans ratio of the banking industry declined by 2.50 percent in the last quarter of 2018 from 14.20 percent in 2017, but the figure is above the CBN’s 5.10 percent threshold, according to a recent report by the National Bureau of Statistics (NBS).

But the report stated that banking sector credit to the economy declined 2.9 percent q/q from N15.6tn in Q3 2018 to N15.1tn in Q4 2018 while total banking sector credit tom the economy declined 2.50 percent to N61.70 trillion in 22018 from N63.30 trillion in 2017.

Analysts say lenders will continue to apply brakes on lending in 2019 because they will always find a way to make money.

“In our view, we believe banking sector credit to the real economy will remain subdued for as long as yields on government instruments remain as attractive as they are,” said analysts at CSL Stock Brokers Ltd.

“Even in the event of a moderation in yields on fixed income instruments, many banks believe that as long as yields remain above 10%, they still remain attractive considering that fixed income instruments have no Capital Adequacy Ratio (CAR) implications, are tax free and do not result in NPLs. Little wonder NPLs are moderating with decreasing loans to the real sector,” said the analysts.