Banks profitability under siege as Treasury Bills yields fall

Nigerian banks may find it difficult to sustain their profitability this year given the reduction in Treasury Bills yields, which many of them depended heavily on last year to shore up their earnings, National Daily has gathered.

Fitch Ratings had projected that given the reduced yield on treasury bills, banks would struggle to remain profitable this year as such the financial institutions would definitely limit their risk appetite so as not to be caught off guard.

The federal government had announced plans to refinance some maturing domestic debts with external borrowings. Owing to this, the government has since slowdown on its fixed income securities issuance which led to a significant drop in interest rate from around 18 per cent to about 10 per cent presently.

A review of the audited results of 13 banks by National Daily, comprising the five tier 1 banks and eight tier 2 lenders, showed that the tier 1 banks continued to control a significant chunk of the market in terms of assets, gross earnings, loans and advances and customer deposits.

The review showed that the total assets of the 13 banks increased to N37.801 trillion at the end of 2017, higher than the N33.997 trillion recorded in 2016.

But the five tier 1 banks listed above, at N22.355 trillion, accounted for 59 per cent of total assets in 2017, while the total assets of the tier 2 lenders stood at N15.446 trillion during the same period.

The full year 2017 audited results of the 13 commercial banks showed that they raked in a total of N2.013 trillion through net interest income (NII) as they took advantage of the high yield environment for fixed income securities last year to boost their profits.

The amount realised by the 13 banks represented an increase by 11 per cent, compared with the N1.799 trillion they made in 2016.

Nevertheless, the situation may be different in the 2018 operating year as the ‘free lunch’ appears to have come to an end following the federal government’s reduced domestic borrowing, in line with its debt management strategy.

According to the Head of Research, Guy Czartoryski, “For two years, Nigerian banks have had an easy time, earning good income on risk-free government-backed, Naira-denominated securities.”

“That era is drawing to a close as T-bill rates fall. Asset yields are trending south, and it is almost impossible to re-price liabilities to match. So, banks must either find other sources of income or face an average 15 per cent drop in their profits before tax expectation for 2018.

“For the banks to replace the portion of income threatened by declining yields on securities, they must grow risk-weighted assets. This means a 6-12 per cent rise in customer loans in 2018.”

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However, analysts at Renaissance Capital Limited, had predicted a loan growth of 10 per cent for the sector. But, it pointed out that the appetite to create new foreign currency assets remains relatively weak, saying that loan growth would largely be driven by the local currency book.

Beside these, for 2018 and beyond, Nigerian banks would also have to contend with increased regulations, disruptive models from financial technology companies, threats of cybercrime as well as intense competition in the industry.