Banks’ interest income from investment securities has fallen for the first time in five years as the regulator may be reluctant to reverse some stringent policies in the face of economic crisis caused by COVID-19.
For the first three months through March 2020, the largest lenders in Africa’s biggest economy realised N209.62 billion in interest income from short-term government securities, a 1.79 percent reduction from N213.35 billion made the previous year.
In the past five years, they have realised a combined N1.09 trillion, but those good old days – when they took advantage of attractive yields by parking their money in government securities – may be over.
Interestingly, the decline, which has continued to hurt banks’ earnings, did not come as a surprise to analysts as they had been expecting such a drop given the dislocations of the fixed income markets brought on by heterodox policies adopted by the central bank.
The CBN announced a flurry of regulations in the third and fourth quarters of 2019, including the minimum Loan to Deposit Ratio (LDR) level of 65 percent, as well as banning corporates and Pension Funds Administrators (PFAs) from participating in its Open Market Operation (OMO).
These policies resulted in a downward pressure on lending rates due to buoyant system liquidity as well as pressure on banks to create new loans.
“Gains from interest income from loans to customers helped compensate for the drop in yields,” said Gbolahan Ologunro, equity research analyst at CSL Stockbrokers Limited. “However, with the impact of the virus on the economy, gains made from loans extended to customers will be eroded.
Yields will remain where they are in the short term. And the regulator may not reverse these policies in the short term.”
Ologunro said if the central bank reverses the policy, banks would invest their money in OMO bills, and there would be little left for lending.
Total income from investment securities for the largest banks makes up 34.15 percent of total interest income and similar charges of N684.33 billion as at March 2020.
Combined interest income from loans and advances increased by 6.51 percent to N449.59 billion as at March 2020, from N422.09 billion the previous year.
According to the recent data on the banking sector for Q4 2019 by the National Bureau of Statistics (NBS), banking sector credit to the economy grew for the second consecutive quarter by 5.8 percent in Q4 2019 to N17.2 trillion, the highest level since 2007.
Total cumulative loans and advances of the 10 largest lenders increased by 13.53 percent year on year (Y/Y) to N17.15 trillion as at March 2020, the highest in four years, according to data gathered by BusinessDay.
Analysts say the recent business paralysis caused by lockdown imposed by government to contain the coronavirus pandemic will result in huge impairment since customers will find it difficult to pay interest on money borrowed.
During an economic downturn, cash flows of companies are usually under pressure, and some of them scale back on expansion plans just to stay afloat.
“I think for Nigerian banks the opportunity to create risk assets will diminish, and just like any other sector, they will face difficulty,” said Johnson Chukwu, managing director and CEO, Cowry Asset Management Limited.
“Non-interest income will be affected as letters of credit have reduced since general level of production has fallen,” Chukwu said.
