For Deposit Money Banks (DMBs) to tow the line of profit in 2014, they need to be conscious of their non-interest expenses. This is because a continuous increase in the ratio of non-interest expenses to gross income may impede banks’ ability to increase profits, the Central Bank of Nigeria (CBN) has said.
A look at the banks’ income and expense-based indicators at the end of June 2013, shows that the ratio of interest margin to gross income declined to 61.6 percent from 64.3 percent at end December 2012.
Similarly, the ratio of personnel expenses to non-interest expenses fell by 5.2 percentage points to 38.7 percent, from 43.9 percent at end-December 2012. However, the ratio of non-interest expenses to gross income increased by 0.8 percentage point to 65.7 percent at end-June 2013, from 64.9 percent at end-December 2012, the Financial Stability Report for the end of June 2013, released recently by the CBN has indicated.
Chukwuka Monye, managing partner, Ciuci Consulting, had told BusinessDay that as banks continue to wrestle for low-cost deposits, in view of reducing fee incomes and profitability margins – even as COT rates drop to a maximum of N2 per mille – competition in the banking industry was expected to be stiffer in 2014.
The report revealed that the quality of assets in the banking system deteriorated in the review period compared with the position during the preceding half year. At 3.7 percent, the ratio of non-performing loans to total loans indicated an increase of 0.2 percentage point above the level at end-December 2012, but a decline of 0.6 percentage point below the level at end-June 2012. Also, the ratio of core liquid assets to total assets decreased by 3.5 percentage points to 21.2 percent at end-June 2013, from 24.7 percent at end-December 2012.
Similarly, the ratio of liquid assets to short-term liabilities declined by 3.9 percentage points to 25.0 percent at the end of June 2013.
According to the report, the banking industry was resilient to credit risk as the impact of the most severe credit risk shock (200% rise in NPLs) resulted in Capital Adequacy Ratio (CAR) of 11.99 percent, which was 1.99 percentage points above the 10 percent threshold. Similarly, the large and medium banks were less vulnerable to the most severe shock, as they maintained CARs of 13.58 and 11.35 percent, respectively. However, the small banks’ CAR deteriorated to 2.39 from 18.33
percent, requiring N96.03 billion to raise their CAR to 10 percent. Under this scenario, 11 banks maintained CARs above 10 percent, six banks had between 5 and 10 percent, three banks had less than 5 percent, but greater than zero percent and three others recorded negative CARs.
The banking industry and the three peer groupings showed significant levels of concentration risk as indicated by the level of capital deterioration. If the credit facilities of the five biggest corporate obligors were to deteriorate from “doubtful” to “lost,” the CARs of the banking industry, large, medium and small banks would decline from 18.69,18.86, 18.25 and 18.33 percent to 7.34, 7.62, 6.05 and 7.80 percent, respectively.
Under this scenario, only five banks would be able to maintain CARs equal to or above 10 percent, while the remaining 18 would record less than 10 percent CAR. the banking industry resulted in the liquidity ratio falling to 33.48 percent, though above the threshold of 30 percent from 69.70 percent. Large banks followed the same trajectory as their liquidity ratio deteriorated to 30.27 percent from 70.22 percent. The medium and small banks showed more resilience as their liquidity ratios were 37.50 percent for the medium and 45.37 percent for the small banks, from 75.45 percent and 68.47 percent, respectively.
However, all the categories remained above the 30 percent benchmark. The banking industry and the three peered banks were, therefore, resilient to the liquidity shock at the level indicated.
