Banks face weak earnings in 2020 as COVID-19 disrupt businesses

Nigerian banks are in danger of recording weak earnings this year as the coronavirus pandemic weighs on operations, investment banking firm Afrinvest Securities Limited has said.

Afrinvest Securities Limited in a document issued in Lagos and titled: The 2020 Nigerian Banking Sector Report that “Nigerian banks could suffer weak earnings growth in 2020 following the adverse effect of the COVID-19 pandemic on their performance as well as counter measures introduced by the Central Bank of Nigeria to support vulnerable businesses.”

The commentary further said “he combined effect of higher impairment charges and forex losses and the low yield environment (loan and investment securities) amid higher OPEX charges could lead to a steep decline in the bottom lines of Nigerian banks in the short term.”

Bloomberg had in October predicted that around 40 per cent of loans in the books of Nigerian banks would have to be restructured because they stood the risk of ending up as non-performing loans next year.

The Afrinvest report observed that introducing a minimum Loan-to-Deposit Ratio (LDR) rate of 65 per cent, which carried a sanction for defaulting banks, had compelled banks to embrace mild pricing wars, resulting in the reduction of lending rates.

Afrinvest further remarked that restructuring of loans had weakened interest income while penal measures by the Central Bank of Nigeria through cash-reserve-ratio debits would affect interest income negatively, considering that large pools of cash remained non-earning.

“We note that rates in the fixed income market have compressed significantly due to robust liquidity positions.

“In our view, we believe that non-interest income could be the major game changer for top line growth in 2020 as interest income comes under pressure,” Afrinvest said.

The firm is optimistic of a steady rise in the banking industry’s total loans as Nigerian banks comply with the LDR policy among others.

It foresaw that downside risks like asset quality deterioration could weaken earnings growth and other key financial metrics including return on equity and return on asset.