The free lunch for banks may be coming to an end as their loan books are expected to expand over the course of 2018 amid reduced domestic borrowing by the government, likely keep money markets yield subdued.
Analysts are of the view that an expansion in bank credit extension brings some risks as loan growth was minimal in the past 18-months since banks took advantage of the attractive yield on government securities to grow interest income.
“Essentially, we anticipate the following on the part of the banks: A decline in Net Interest Margins, which have grown in the past year due to considerable rise in assets yield on investment securities; and a gradual decline in funding costs as deposits gradually move away from government instruments,” said Gloria Fadipe, head of research at CSL Research Limited.
“Reduced domestic borrowing by the government will most likely keep money market yields subdued, and could potentially clear the path for further interest rate decreases (we have seen rising interest rates in the past year fuelled by increased government borrowings),” said analysts at CSL Securities Limited.
Nine months ago, yields on Treasury Bills (TB) hovered around 21 and 23 percent as government sold short term securities with a view to raising money to fund budget deficits and mop up liquidity.
As a result, 13 banks (Zenith Bank, Access Bank, Diamond Bank, Fidelity Bank, First City Monument Bank, Guaranty Trust Bank, Stanbic IBTC Holdings, United Bank for Africa, Union Bank, Sterling Bank, Unity Bank, FBNH and Wema Bank) combined raked in N562.67 billion as interest income from Treasury Bills in the third quarter of 2017, representing a 53.55 percent increase from last year’s figure of N366.42 billion.
The cumulative loans and advances to customers of the 13 banks fell by 2.57 percent to N14.36 trillion for the first nine months through September 2017 from N14.74 trillion in 2016, according to data compiled by BusinessDay.
However, yields on 90 days short-term paper saw a sharp decline to 8.75 percent on Tuesday from 17.24 percent on Monday this week, after a press release from the Debt Management Office (DMO) announcing plans by the Federal Government to redeem in full N198.032bn in Treasury Bills maturing in December 2017.
The N198.0 billion ($550 million) comprises of N131.415 billion and N66.617 billion of bills which will mature on December 14, 2017 and December 21, 2017 respectively. Historically, treasury bills were rolled over at maturity.
Tajudeen Ibrahim head of research at Chapel Hill Denham limited said that the loan book expansion will be underpinned by possible financial system liquidity as the central could cut the CRR and interest rates in the first quarter of next year.
“We have seen the apex bank slow the issuance of open market operation or OMO bills. Market conditions will require that they increase lending to the real sector. We will surely see loan book expand on market dynamics,” said Ibrahim.
Lending in Africa’s biggest oil producer stalled in 2016, according to ratings agency Moody’s estimates, as the economy contracted for the first time in 25 years and non-performing loans soared.
A recent National Bureau of Statistics (NBS) report on the banking sector, showed a total of N15.83 trillion worth of credit was allocated to the private sector in Q3 2017, up marginally (0.76%) from N15.71 trillion in the second quarter of 2017.
According to the report, credit allocated to most sectors declined; including the agricultural sector (3.11% of total credit) which fell by 0.08 per cent points compared to the second quarter, oil and gas which amounted to 22.38 percent of total credit in the reported quarter fell by 0.08 percentage points compared to the level in the second quarter of 22.46 per cent.
Credit extended to the power and energy sector as a percentage of total outstanding credit by banks fell to 2.90 percent in Q3. Also credit extended to the trade and commerce sector, real estate sector and transport and storage sector fell by 0.08, 0.01 and 0.21 percentage points respectively.
Credit extended to some sectors like finance, insurance and capital market remained unchanged in the quarter compared to the previous quarter, while there was some rise in the credit allocated to some other sectors such as manufacturing, construction, Education and information and communication which increased by 0.22, 0.12, 0.01 and 0.20 percentage points in the period.
Total assets of the 13 lenders increased by 4 percent to N28.34 trillion in September 2017, from N27.22 trillion in 2016.
Banking system assets account for about 30 percent of Nigeria’s gross domestic product (GDP), much lower than many other African and most developed countries, according to Moody’s estimates.
BALA AUGIE
