Nigeria banks are expected to begin to look for alternative opportunities for profit following the decision of the Federal Government to cut down on the issuance of treasury bills (T-bills) in 2018.
The slowdown in net T-Bills (NTB) issuance marks a change of strategy, as the government looks to increase its financing from external sources and longer-dated domestic issuances.
“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,” Fitch said Friday, January 5.
Analysts say banks should look for other opportunities to grow income as treasury bills yields is expected to fall in first quarter 2018.
“They could play more with bonds though that will slightly impact their interest income for2018, they will also look for other opportunities that will give higher returns such as loans,” said Ayodeji Ebo, Managing director, Lagos-based financial advisory, Afrinvest Limited.
Nigeria issued a dual-tranche USD3 billion Eurobond in November 2017 out of which USD2.5 billion is to part-finance the deficit in the 2017 Appropriation Act and the balance of USD500 million is for the refinancing of domestic debt.
As at 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.
“Banks invested heavily in treasury bills last year because yields were high, they also moved funds from deposit account to invest in treasury bills, funds they could have use in bonds dealings,” said Ayo Akinwummi, Head of research at FSDH.
Akinwummi added, “However, this year as Treasury bill yields reduce banks can also access fund at a lower rate.”
High yields on NTBs issued in 2017 (around 13-14 per cent on 90-day bills) had attracted investors and helped to support the naira, an increase in oil export earnings and the introduction in April 2017 of the “Investors’ and Exporters’ foreign exchange (FX) window”, also helped in stabilising the nation’s currency in the second half of 2017.
“There is really nothing they can do, most banks are not in a position to grow loan books, majority of the banks’ need to sort out their low capital adequacy ratio and non-performing loans which is still quite high, except for highly capitalised tier one banks,” said Wale Okunrinboye, Head of fixed income and currency research at Ecobank.
“Last year, Interest rates went up significant, because CBN was trying to sort out the currency, this year banks will have to deal with lower earnings, especially banks that diverted majority of its earning into treasury bills as there is no assets that can replace that,” Okunrinboye added.
The Federal Government raised N161.54 billion at a T-bill auction on last Wednesday after it received subscriptions for more than twice the amount on offer.
According to the traders, the Central Bank of Nigeria (CBN) sold N115.85 billion of one-year debt at a rate of 14.30 percent. It auctioned N11.77 billion and N33.93 billion respectively in three and six month’s maturities at 12.54 percent and 13.92 percent. Total subscription stood at N388.50 billion.
Last month, the government repaid N198 billion worth of treasury bills using part proceeds of a $3 billion Eurobond issue, instead of rolling over the debt to lower its borrowing costs as It plans to repay more bills this year.
DIPO OLADEHINDE
