Banks’ non-performing loans, PAT and others in Q3 2020

The nine-month financials of deposit money banks in the country are beginning to show the magnitude of the impact of COVID 19 on the performance of financial institutions in the country. Based on the figures emerging from that sector, commercial banks in Nigeria reported mixed results for Q3 2020, that is, January to September 2020, with the banks’ Profit After Tax (PAT) increased but at a declining rate when compared with the same period in 2019. The comprehensive profit for the reference followed a similar trend.

The slow growth rates were caused by a combination of factors including the pressure on interest margins occasioned by reduced credit demand and interest concessions granted to businesses and individuals as pandemic reliefs, which thus increased impairment provisions and low yields on surplus liquidity.

The banks recorded a combined interest income of N639.71 billion in Q3 2020 as against N795.67 billion in the same period in 2019. This represents a 20 per cent decline. Aside from the health crisis that almost halted the world’s economic activities, it is interesting to note that, not just the pandemic that is taking its toll on the banks’ interest margin: competition for customers, especially, a recessionary period like this reduces credit demand. Interest income on loans declined by 9 per cent QoQ.

The ups and downs reflected on the commercial banks’ margins which were as a result of the combination of factors that played out during the post and pre Covid era; the pre-pandemic slowing down of business and the consequent rise in impairment charges, and many concessions, voluntary as well as regulator-mandated, that the bank had to provide in support of customers affected by the impacts of COVID-19.

However, the banks’ ability to limit the decline in net interest income for the period to 9 per cent was due to its success in reducing interest expenses on deposits by 31 per cent to N171.78 billion from N249.42 billion in the same quarter 2019.

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Similarly, there were also other gains in some areas that helped weather the negative impacts to some extent. For instance, commercial banks relied broadly on trading income and gains from the devaluation of the naira during the period under review to boost earnings.

Total trading income for the period (Q3 2020) grew impressively by 107 per cent to N181.24 billion against N87.64 billion in the corresponding quarter of 2019. Similarly, Trading income on Fixed Income securities grew by 139 per cent to N60.86 billion from N25.84 billion QoQ.

The results compiled by BusinessDay Research and Intelligence Unit (BRIU) from the National Bureau of Statistics (NBS) elaborated that although the total operating income had increased by a respectable 6 per cent to N646.04 billion in the review period, impairment charges on loans, receivables / leases also increased significantly by 49 per cent to N57.04 billion for the period ended Q3 2020. The increase in provisions was mainly due to the higher credit risk on loans and lease losses.

The allowance for loan and lease losses was originally referred to as the “reserve for bad debts,” is a valuation reserve established and maintained by charges against a bank’s operating income. As a valuation reserve, it is an estimate of uncollectible amounts that are used to reduce the book value of loans and leases to the amount that is expected to be collected.

Key elements that impacted commercial banks’ margin
Elaborating on some of the key elements that impacted commercial banks’ performance for the period ended Q3 2020, the banks’ aggregated net fees and commissions reduced slightly by 0.1 percentage point to N148.67 billion as a result of a 9 per cent reduction in those components in the third quarter of the year due to the disruption caused by the COVID-19 pandemic and the reduction of charges by banks as required by the regulator. However, the negative impact of this decline was cushioned by operating income which grew by 8 per cent to N663.89 billion from N617.45 billion in Q3 2019, principally because of an increase in trading income and recoveries.

The banks’ total operating expenses for Q3 2020 stood at N462.36 billion, a growth of 8 per cent over the corresponding period of 2019, enabling the banks in the country to post an operating profit of N201.52 billion before taxes on financial services, which reflected a slight reduction of 0.3 per cent.
Gross loans and advances declined by N2.84 trillion or 15 per cent to N16.62 trillion from N19.46 trillion at the end of the nine months reviewed.

The banks’ gross non-performing loan ratio declined to 6 per cent in Q3 2020 from 6.7 per cent in the corresponding quarter in 2019.

As part of its response to the COVID-19 pandemic, commercial banks launched a series of concessions and facilities to help businesses and individuals recover from the adverse effects of the pandemic, in addition to its conformance with regulator-mandated concessions. The banks launched bank-funded support loan schemes for SMEs and micro-enterprises, special payment relief schemes for existing borrowers, special repayment plans for credit card customers and slashed interest rates across all the categories of loans. Banks also and assisted the government in setting up COVID facilities centres.