Nigerian banks 2018 profit will take a hit from the decision of the Federal Government to cut down on the issuance of treasury bills in 2018, the latest report from Fitch Ratings has stated.
The report notes that Nigerian banks will find it more difficult to sustain profitability in 2018 given the decline in net treasury bill (T-bill) issuance as seen in the first quarter issuance calendar released by the Central Bank of Nigeria (CBN).
“We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018. The CBN’s latest issuance schedule shows N1.1 trillion (USD3.6 billion) of rollovers in the first quarter of 2018 against N1.3 trillion of maturing bills.”
This is N200 billion less in new T-Bills to be issued in the first quarter compared to 2017, when rollovers fully covered maturing bills. Fitch expects performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains and rising loan impairment charges. However, the largest banks are best placed to withstand these challenges, says Fitch.
“Operating returns are still strong at GTB (9-Month, 2017 operating return on average equity (ROAE): 37%), Zenith (28%), UBA (22%) and Access (20%), while FBNH’s operating ROAE is lower (12%) but improving.
However, some second-tier banks with a 9-Month 2017 operating ROAE of 4%-6% may struggle to remain profitable in 2018.
“Our 2018 rating outlook for the Nigerian banking sector is negative, reflecting continued fragility in the operating environment and the Negative Outlook on the sovereign’s ‘B+’ rating.”
The slowdown in T-bill issuance marks a change of strategy as the government looks to increase its financing from external sources and longer-dated domestic issuances.
Record T-bill issuance in 2017 helped support the Central Bank of Nigeria’s strategy to maintain naira exchange-rate stability. High yields on T-bills issued in 2017 (around 13%-14% on 90-day T-bills) attracted investors and helped to support the naira.
An increase in oil export earnings and the introduction in April 2017 of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism, commonly referred to as the “Investors and Exporters’ FX Window”, also helped naira stabilisation during the second half of 2017.
Nigerian banks are highly reliant on net interest income for profitability and T-bills proved to be an important source of profits in 2017. Interest on securities represented 30 percent of total gross interest earned in the first nine months of 2017, averaged across Nigerian banks rated by Fitch compared to 23 percent in 2016.
By end-September 2017, government securities including T-bills represented more than 15 percent of the banks’ assets as new lending fell, reflecting weak credit demand, tighter underwriting standards and banks’ reluctance to extend new loans as they focused on extensive restructuring of troubled oil-related and other portfolios.
Even the country’s largest banks cut back on new lending, with Guaranty Trust Bank’s stock of outstanding loans falling 10 percent for the nine months ending September 2017, FBN Holdings’ by 4.6 percent, Zenith’s by 3.7 percent and Access’s by 1.1 percent.
However, United Bank for Africa’s loan book grew 5.6 percent, but this is likely to have been driven by non-Nigerian lending as the bank operates in 22 other African countries.
Higher oil prices and increased external reserves are all expected to have a positive impact on the Nigerian economy in 2018.
