Nigerian banks are currently grappling with the biggest surge in the cost of operation seen by some analysts as the highest in the category of emerging markets, BusinessDay analysis of the performance of lenders in the outgoing year has shown.
With average of 60 percent cost to income ratio (CIR), based on the latest quarter-three financials released to the public, analysts say the prospect of reducing lending rate, currently hovering between 26 and 28 percent, by the Central Bank of Nigeria (CBN) to rejig the real sector might be threatened.
“Bringing down lending rate and interest rates generally would be possible when banks’ cost of operation, the highest in the category of emerging market countries, comes down”, said the chief executive of a tier one bank .
“The year 2015 was a very challenging one for financial services institutions in Nigeria, with the resultant effects of regulatory induced reduction in income lines and increase in funding costs. Commission on Transactions (COT), which used to be at N5 per mile maximum, is expected to be zero next year, following agreement between the CBN and deposit money banks.
COT is considered as a major component of the income line for banks. This is in addition to the removal of the N100 that was charged by banks for ATM usage.
”This will definitely affect CBN’s desire to bring down lending rate to rejuvenate the economy”, he added.
CIR is banks’ operating profit margin or the ratio of their operating profit to the revenue that they make, and it determines how efficiently, a bank is being run and how it earns its own organic income.
With the current decline in oil prices and a weak naira, the analysts say that when these are combined with poor management in the sector, it could result in bad quality assets and therefore escalate the level of nonperforming loans, (NPLs).
The performance of some of the major industry players showed that the five top tier banks, FBN, Access, Zenith, UBA and GTB have an average of 56.28 percent, with GTB recording the lowest of 41.8 percent.
Firstbank recorded 59.9 in Q3 as against 63.8 in the corresponding period of 2014; GTB had 41.8 percent for nine months of this year, against 43.4 percent last year.
Zenith Bank, 55.1 percent against 56.4 percent; Access, 59.6 against 61.2 percent, while Diamond recorded 62.5 percent, against 62.6 percent and ETI had 63.2 percent, against 65.6 percent.
Skyebank recorded 73.3 percent against 75.3 percent; Union Bank, 75.2 percent against 71.5 percent and Sterling, 73.3 percent against 75.3 percent.
Ayodeji Ebo, Head, Investment Research, Afrinvest said, “The high CIR figures of Nigerian banks broadly reflects the difficult operating environment of businesses in Nigeria due to the low level of quality public infrastructure and other structural inefficiencies.
“These have imposed a higher cost of operating branches for banks with the feedback effects seen in high administrative fees charged on loans and customers’ transactions, as well as impaired shareholders return as higher operating costs affect profitability.
“In our analysis of the profitability and efficiency ratios of top-tier banks in the Sub-Saharan Africa region, we discovered that Nigeria top-tier banks on average, have the highest CIR (60.0%) relative to peers – South Africa (56.1%), Egypt (38.5%), Kenya (50.7%) and Ghana (55.2%).
However, forward thinking players in the industry are increasingly leveraging on technology solutions such as the internet and mobile banking, as well as e-branches to better-manage administrative and personnel costs, improve customer banking experience and bolster returns to shareholders.
The era of unbridled expansion of bank branches may have begun to fade as efficiency now takes the front seat. As banks work towards adopting technology to reduce customer visits to the banking halls, they are likely to phase-out huge branch buildings with high cost of maintenance and continue to grow smaller IT driven “smart” branches”.
Razia Khan, managing director, Chief Economist, Africa Global Research, Standard Chartered Bank, London said, “There is little doubt that the relatively high cost of intermediation in Nigeria is a constraint on greater financial access and inclusion.
Going forward, banks will need to find lower cost means of mobilising liabilities if they are to service lower income segments. In terms of lending, this might also constrain lending to all but the highest return opportunities, as banks will be forced by their relatively high C:I ratios to only consider those assets that yield the highest return.”
