High Cost Slows Banks’ Earning in Third Quarter

Lenders in Nigeria, Africa largest economy,  are still grappling with the Central Bank of Nigeria’s (CBN) multiple regulations, as third quarter earnings slow on spiralling costs.

The cumulative after tax profit of 15 commercial bank’s which have released third quarter 2014 financial results,  increased by just nine percent, to N424.04 billion, from N390.09 billion, lower than the 13.16 percent growth recorded in the 2013 period.

Nigerian lenders were less efficient in minimising costs last quarter, as the average cost-to-income (CIR) increased to 63.55 percent in 2014 from 58.97 percent the preceding year.

The average loan-to-deposit ratio for the 15 banks rose to 67.09 percent in the third quarter of 2014 from 62.56 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.

The modest earnings growth of Nigerian banks is commendable when put in the perspective of the market and regulatory pressures, according to Abiola Rasaq of the Research and Strategy Unit of Associated Discount House Limited.

“You will reckon that beyond the increase in funding cost (which partly resulted from increased cash reserve requirement), higher contribution to the resolution cost fund (AMCON levy) and reduced COT charges, all pressured the earnings generation of Nigerian banks in 2013,” Rasaq said in an email response to Business Day’s questions.

Loan-to-deposit ratios measure how inclined bankers are about lending, with higher numbers signalling a more aggressive stance.

The ratio grew, even as the lenders total deposits rose 12.24 percent to N18.90 trillion, from N16.83 trillion in 2013.

The CBN has set a prudential requirement of a maximum loan to deposit ratio of 80 percent for Nigerian banks.

“20 percent of banks return on assets (ROA) is lost to AMCON levy,” said Olubunmi Asaolu, Head Equity Research at FBN Capital “If you take out the levy, their earnings could rise by as much as 25 percent.”

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 may face more cost pressures and lower margins in the near future.

Analysts had expected Godwin Emefiele, the Apex bank’s  chief, to keep interest rates unchanged till February, however some now foresee a further tightening, as the recent fall in oil prices pressures the naira.

The new CBN directive to divert forex demand from the official FX window (the retail Dutch auction) to the interbank market, is seen as having a negative impact on Nigerian bank asset quality.

Bank borrowers, most notably SMEs, could see repayment obligations for their loans become more difficult, as their import bills get inflated (by about 8 – 10 percent, according to analysts) on the back of a higher dollar exchange rate.

With borrowers facing more difficult repayment terms, the banking sector loan quality can be seen taking a dent.

“The rules hurt at a sector level but we see the tier 2 banks taking more pain on the back of this, given their relatively higher exposure to SMEs and lower quality obligors, says Adesoji Solanke, SSA Banking Analyst at RenCap.

“The ability of the obligors to transfer this cost to consumers also affects their capacity to service open obligations”, he says further. 

It will be recalled that the regulators removed some assets lenders can count as capital, in preparation for the implementation of Basel II and III, while limiting Tier 2 capital to 33 percent of higher-quality Tier 1 capital, according to an Aug. 5 circular.

BALA AUGIE