A headwind stoked by regulation and a lack of innovative, customer-friendly products plus dwindling yield in fixed income instruments combined to cast a grim picture on half year earnings of banks, and may affect full year results.
Godwin Emefiele, CBN governor
Higher cash reserve requirement (CRR), the gradual phase out of commission on turnover (CoT) from N5 to N3 in 2013, with zero charge likely in the months ahead, and removal of charges on ATM transactions have taken a big bite from earnings.
Also complicit is the rise in the interest banks pay on savings account and increase in the levy by the Assets Management Corporation of Nigeria (AMCON) from 0.3 per cent to 0.5 per cent of total assets.
Impact of CBN reviews
In April 2013, the Central Bank of Nigeria (CBN) commenced revised bank charges. By the end of the third quarter last year, it raised monetary policy from 12 per cent to 75 per cent (effective first quarter 2014) of local currency public sector deposits as CRR.
With a further hike of CRR on private sector deposit to 15 per cent from 12 per cent, an estimated N2 trillion was sterilised in the banking system between December 2013 and first quarter 2014.
This came on the heels of last year’s reintroduction of the Retail Dutch Auction System (RDAS) by the CBN to curb round tripping in exchange rate.
Given the significant revenue loss from the hike in CRR, cut in tariff and charges, increased funding cost, pressure on yields and net interest margins (NIMS), interest income, and pressure on non-funded, it did not take long to hit banks’ net earnings.
First Bank reported that in 2013 financial year, N389 billion consisting of public sector deposits with potential yield of about N7 billion or 13 per cent was rendered unproductive.
The rise in the interest banks pay on savings account to 3.6 per cent represented a minimum 30 per cent of monetary policy rate (MPR). The bank said its growth was hampered by increased interest cost that stood at N9.2 billion.
Besides, the gradual phase out of COT from N5 to N3 in 2013 cost First Bank N3.4 billion in earning.
The removal of charges on ATM transactions and increase in AMCON levy from 0.3 per cent to 0.5 per cent of total assets and 1/3 of contingencies compounded the woes of banks.
Also for First Bank, the cost implication amounted to a loss of N16 billion.
The bank is not alone in these regulation-induced losses as other banks are also ruing the impact of the headwind that threatens to shrink returns on the investment of shareholders.
More woes in half year results
First Bank’s half year to June 2014 pre-tax profit fell 12 per cent to N48.25 billion, compared with N54.81 billion in the same period last year. However, gross earnings climbed to N164.85 billion from N150.73 billion.
The profit of the United Bank for Africa (UBA) shrank by 19.57 per cent, Diamond Bank reported a pre-tax profit drop to N16.07 billion, 8.4 per cent lower than the N17.56 billion in the same period last year.
Skye Bank said its half year to June pre-tax profit dropped 31 per cent to N7.26 billion, against N10.54 billion in corresponding period of 2013. Its gross earnings dropped to N63.88 billion from N71.16 billion.
Union Bank reported a drop in gross earnings to N49.6 billion from N56.2 billion in 2013; its profit before tax fell to N6.5 billion and profit after tax to N6.3 billion, against N9.8 billion and N9.4 billion last year.
With increased exposure to foreign currency lending in 2013, Fidelity Bank suffered a severe profit squeeze as weaker performances that have characterised recent results persisted.
Gross earnings were flat at N63 billion, net margin declined to 12.76 per cent in 2014, from 14.47 per cent last year.
Net margin measures efficiency and profitability.
Profit after tax dipped by 12 per cent to N8.07 billion in HY 2014, compared with N9.06 billion in the same period last year, and profit fell 15.72 per cent to N9.43 billion, against the previous N11.19 billion.
While Fidelity Bank posted a good growth in interest income, weaker non-interest income generation as well as rising operating expenses were major drags on after tax earnings.
However, the half year result of Ecobank was a significant improvement and an exception as it consolidated on Q1 performance.
Gross earnings rose by 13 per cent and earnings after tax by 15 per cent – due to greater income generation rather than operational efficiency as all expenses trended upwards.
The bank incurred a loan loss of about N60 billion in full year 2013.
Share prices tumble
Share prices dropped significantly on the Nigerian Stock Exchange (NSE), in reaction to banks’ poor financial results, as investors picked them up at a discount.
Penultimate week, stocks recorded price depreciation of between 15 per cent and 51 per cent year-to-date while the shares of banks with impressive financial performance continue to rise in prices.
Diamond Bank, which traded at N7.50 per share in January 2014, fell 14.9 per cent to N6.38 per share, or N1.12 price loss. Fidelity Bank lost 68 kobo to N2.02 from N2.70 per share or 25.2 per cent.
Sterling Bank fell the most by 51 per cent from N4.51 to N2.21 per share, followed by Skye Bank with 31.26 per cent loss from N4.51 to N3.10 per share. Union Bank lost N1.6 or 16.32 per cent, reducing to N8.20 per share from N9.80. UBA depreciated by N1.35 or 14.75 per cent to N7.80 from its 2014 opening price of N9.15 per share.
First Bank fell from N16.30 to N15.25 per share; Unity Bank remained 50 kobo flat; GT Bank, Zenith, ETI, Stanbic IBTC, First City Monument Bank (FCMB) and Access Bank recorded varying degrees of price gains.
ETI, Stanbic IBTC, and FCMB appreciated the most.
Way out
Bola Ajomale, Managing Director and Chief Executive Officer of the National Association of Securities Dealers (NASD), advised banks to focus on deposit mobilisation by widening the range of services and products in a very innovative and customer-oriented manner.
He urged banks to look beyond making money from public sector deposits and concentrate on project financing and other pure banking services.
According to him, banks with a wide range of innovative products, customer-oriented and efficient services will retain customers and post good earnings; those that focus on the government will have poor earnings.
Earlier this year, an international investment research and private equity firm, Renaissance Capital (RenCap), warned that with a blended CRR of about 20 per cent, the environment does not allow for significant earnings growth.
RenCap cautioned banks against heavy focus on corporate lending fraught with tightening monetary policy environment since 2012.