Nigerian banks are getting some help in their quest to repair balance sheets and build capital buffers from the Central Bank, which has maintained elevated interest rates that act as some form of regulatory forbearance for lenders.
The high interest rate environment is in essence buying time for the banks as they seek to earn their way out of the hole a lot of them are in, rather than raise fresh capital.
Five banks have reported half year (H1) results at the end of last week including Diamond, FBNH, FCMB, Unity Bank, and Union Bank.
The country’s largest lender by assets FBN Holdings reported that net interest income surged 30 percent in the half year (H1) 2017 period to N164 billion from N126 billion in the prior period.
Diamond bank a mid-tier lender also benefited from the current high yield environment as its net interest income surged by 23.4 percent in the H1, 2017 period compared to the earlier period.
Fig 1: Banks Interest Income trends H1, 2017
Source: BMI, Company Financials
Some of the country’s lenders are struggling to meet capital requirements after a plunge in oil prices since mid-2014 cut government revenue, reduced consumer spending and plunged the economy into recession.
A shortage of dollars has also made it harder for businesses to survive, prompting a surge in non-performing loans.
High interest rates on government securities (one year Treasury bills currently yield about 18 % in the primary market), and low deposit rates have led to juicy net interest margins (NIMs) for the banks.
The average savings and term deposit rates fell to 4.08 percent and 8.65 percent in May, according to the most recent economic report from the CBN.
The CBN held its benchmark interest rate at 14 percent last month for the sixth straight time.
It is no wonder that equity investors are ecstatic for bank stocks and have driven the Nigerian Banking index up 68.7 percent year to date, compared to a 37 percent gain for the broad market index.
Offshore portfolio investors are also nibbling on blue chip bank stocks as net foreign inflows in June were positive for a third consecutive month to the tune of N30.33 billion, according to data from the stock exchange.
The impact on the wider economy however is double edged.
While repairing bank balance sheets is positive for the economy, the choking off of credit to wide sectors and often those in need of it most is a negative for growth.
If a banker can advance risk free loans at 18 percent per annum to the government why bother with riskier loans especially with spreads so wide?
This phenomenon can be observed as Diamond Banks net loans declined by 1.1 percent in the most recent quarter to N984.3 billion compared to the level it was at Full year 2016, while FBNH net loans fell by 4.1 percent in 6 months (H1 2017, compared to FY 2016).
The CBN faces the challenge of normalising elevated rates while at the same time keeping an eye on surveillance and measurement of risks, and working to enable banks strengthen capital buffers amid its regulatory forbearance.
Walking that tightrope is a tall order even for the best of Central Bankers.
PATRICK ATUANYA
