Banks are grappling with a low yield environment as evidenced in dwindling revenue, but most of them recorded profit growth, thanks to a reduction in impairments of financial asset, income from fees and commission income.
Amid these challenges, some lenders have utilized the resources of their owners in generating higher profit, which means there has been an increase in return on average equity (ROAE). The higher the ratio the better, because it means a firm is profitable and efficient.
Access Bank and Guaranty Trust Bank exhibit stronger ROAE than peers.
For instance, GTBank’s ROAE of 32.15 percent- higher than 16.15 percent industry average- is higher than the 29.17 percent recorded during the previous year. An ROAE of 32.50 implies N0.325 returned on every $1 invested, so the higher the returns the better.
The marriage between Access Bank and Diamond Bank was a boon for the Access Bank as ROAE moved to 30.85 percent in March 2019 from 17.58 percent as at March 2018. The lender recorded the fastest ROAE expansion among peers, driving the 2019 figure above the industry average.
Zenith BanK and Stanbic IBTC Holdings Plc have consistently distinguished themselves among the midsized banks as it continues to remain efficient. Its ROAE of 30.47 percent, although lower than 43.43 recorded in the corresponding period of last year, is above the industry average of 16.13 percent.
United Bank for Africa (UBA)’s ROAE moved to 21.92 percent in March 2019 from 18.40 percent the previous year; an ROAE of 0.2192 percent implies N0.2192 returned on every N1.
Interestingly, First Bank Holdings’ 11.76 percent ROAE is below industry average, but the ratio increased from 9.72 percent recorded the previous year as the lender surmounted brought on by the sudden drop in crude oil price that stoked poor asset quality.
While Fidelity Bank (a midsized lender) saw ROAE increased to 12.44 percent in March 2019 from 10 percent previous year, the ratio is below the industry average.
It must be noted that ROE can be misleading because each of the firms has a different cost of equity and debt levels, which is the more debt a firm has, the higher the ROE is pumped up in the short term, at the expense of long term interest payment burden.
Cost of equity or Ke is the minimum rate of returns owners expect for taking a risk in a company.
Nigerians banks could see profit pressured, and margin squeezed if the Central Bank of Nigeria (CBN) decides to prevent them from having access to near risk-free rate called yield on short term government securities.
Yields have been a major driver of earnings in the last 4 years as deteriorating assets quality due to a sudden drop in oil price discouraged lenders from extending credit to the private sector.
Net credit to the government surged 64 percent in the first four months of the year, vs 9.60 percent for the private sector.
During the Monetary Committee Meeting, Governor of the central bank, Godwin Emefiele, said the MPC wants the lender of the last resort to provide a mechanism for limiting the ability of banks to put customer money into government securities.
Emfiele’s argued that credit to the private sector should improve since Non Performing Loans (NPLs) are down to below 10 percent compared to 17 percent a year ago.
But analysts say it is easier said than done because the apex bank will continue to aggressively participate in Open Market Operations (OMO) in order to mob up excess liquidity in the system and maintain foreign exchange stability.
BALA AUGIE
