Nigerian banks will see stronger earnings growth by year- end 2014, despite being off to a slow start to the year, as they struggled to overcome regulatory headwinds that crimped profits.
Analysts say better year – end performance by banks will be anchored on a shift towards a higher current account and savings account (CASA) mix, while risk asset creation should also begin to ramp up.
“From 2013FY we saw a good level of loan growth which should push interest income upwards though marginally as a lot of banks commented about the majority of that growth being in dollar denominated assets which carry a lower yield,” said a research analyst with Meristem Securities Limited.
Bankers incurred huge operating and loan loss expense in the first quarter (Q1) as the cumulative pretax profit of 14 commercial banks which have released Q1, 2014 results, shrank by 5 percent, to N152.66 billion from N161.13 billion in the preceding year, BusinessDays analysis of lenders results show.
The cumulative gross earnings of the lenders in Q1 2014 rose by a mere 2 percent year on year, to N641.10 billion as against N627.79 billion the preceding year.
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The primary reason for the sluggish growth is due to banks not wanting to increase the risk profile of their books markedly without the introduction of the biometric system, according to the Meristem analyst.
“This system is expected to allow for the banks to grow risk assets without carrying the same level of risk usually associated with retail segment loans,” said the analyst.
“Also, most banks prioritised a focus on reorganising their balance sheet to address basel 3 requirements, bordering on extra capital requirements for contingencies.”
Nigeria lenders loan loss expense, which measures the amount banks set aside as allowance for bad loans, surged 68.90 percent to N16.74 billion in Q1 2014 from N9.91 billion in the preceding year, analysis of the data shows.
The average loan-to-deposit ratio for the 14 banks rose to 61.22 percent in the first quarter of 2014 from 57 percent a year earlier, as lenders sought to replace profits lost to higher cash reserve requirements (CRR), tighter monetary policy and regulation aimed at lowering fees and increasing competition.
Loan-to-deposit ratios measure how inclined bankers are about lending, with higher numbers signaling a more aggressive stance.
“Higher cash reserve requirements imposed by the Central Bank, crimped profit last year by N3 billion,” said Diamond Bank’s chief financial officer, Abdulrahman Yinusa, in a recent interview.
“Higher volume of customer deposits will help us reduce the effect.”
Lenders total deposits rose slightly by 1 percent to N15.0 trillion, from N14.88 trillion in 2013.
The Central Bank of Nigeria (CBN) has set a prudential requirement of a maximum loan to deposit ratio of 80 percent for Nigerian banks.
The CBN has increased CRR -the minimum cash, as a percentage of customer deposits that each bank must set aside as a reserve, from 4 percent in 2011 to 15 percent for private deposits and 75 percent for public sector deposits.
The regulator also told lenders to lower fees and commissions to reduce costs to customers.
Banks are beginning to loosen lending practices after a rise in margin loans fueled a credit bubble in 2009 leading to non performing loans (NPLs) rising to as high as a third of total banking industry loans.
Nigerian lenders signed about $13.5 billion of syndicated loan deals in 2013, rivaling South Africa.
They are also raising capital to boost capacity to lend, as they seek to grow risk assets to take advantage of continuing opportunities in Africa’s largest economy.
Zenith Bank, Nigeria’s second biggest lender by market value, recently sold $500m in 5-y senior unsecured Eurobonds.
“With most banks strategies’ being a significant growth into the retail segment (save for UBA) it is not strange that their performances so far in the year are tempered,” said the Meristem analyst.
BALA AUGIE
