Sterilisation Continues to Hit Banks' Profit

Sterilisation Continues to Hit Banks’ Profits

CBN Governor, Sanusi Lamido Sanusi

• Regulatory actions blamed for dip in performance

By Steve Omanufeme

Nigerian banks, which in 2012 grew earnings at the fastest pace since the banking crises in 2009, saw profits dip in the third quarter of 2013 as lower interest rates and a slew of regulatory actions began to hit their bottom lines.

The Q3 profit trend is being projected by analysts to continue in the last quarter of 2013 which will imply reduced year-end profitability for the banks.

Nigeria's banks began to face a profit squeeze in the second half of 2013 as a result of new measures by the Central Bank of Nigeria (CBN) to help the country's economy, specifically aimed at making them lend more to domestic businesses and consumers.

One of such measures specifically raised the cash reserve requirement for banks holding government money to 50 per cent from 12 per cent, meaning they had to hold half of those deposits with the CBN.

Since the sterilisation of public sector funds, profits have dropped for most of the banks that have released results for the third quarter of 2013 and the trend is expected to continue into the fourth quarter.

“The directive by the central bank ... will continue to have a negative impact on banks’ ability to create earning assets,” said George Bodo, banking analyst at Ecobank, who expects fourth quarter bank earnings to decline by 10 per cent. Analysts further warned that profit growth by Nigerian banks would slow in the near term unless they grow their retail businesses, which remain largely untapped.

The CBN had in 2013 also directed deposit money banks to lower fees and commissions starting April 1 to minimize conflict with clients, which has had an impact on earnings.

Again, the rising interest rate environment and the ample liquidity banks enjoyed between 2011 and 2012, which helped to raise profits, was equally replaced by lower interest rates and a tighter monetary policy.

In the review period, average yields on Nigerian fixed income securities fell from as high as 18 per cent at the beginning of 2012 to an average of 14 per cent by the end of the second quarter of 2013. The CBN's sustenance of its benchmark interest at a record 12 per cent throughout 2013 meant the banks operated in a tight interest rate regime.

Most analysts saw the difficult times ahead for the banks when the cash reserve requirement ratio (CRR) for banks was raised from 4 per cent in 2011 to 12 per cent for private deposits and 50 per cent for public sector deposits in 2013, which led to a withdrawal of N950 billion of liquidity from the banking sector.

“We expect the introduction of a 50 per cent CRR on public sector funds to have a negative impact on the banking sector,” said Muyiwa Oni and Rele Adesina, analysts with SBG Securities, in a note released July 24.

“We forecast it could result in lost interest income of about N45 billion for the banking sector as a whole.”

Apart from Guaranty Trust Bank (GTB) and Stanbic IBTC, which saw marginal profit increases in the third quarter, most banks saw their profits dip.

Unlike its peers, Stanbic IBTC Holdings' nine-month profit before tax rose by 126 per cent to N20.33 billion, up from N8.740 billion in the same period last year.

The gross earnings at the Nigerian unit of South Africa’s Standard Bank rose to N83 billion during the nine months to September 30, as against the N64 billion achieved last year.

The bank's net interest income also increased to N27.094 billion, from N26.601 billion last year.

GTB also witnessed marginal growth, as profit grew by 7 per cent to N82 billion from N76.9 billion in 2012. Gross earnings grew by 9.3 per cent year-on-year (y/y), though quarter-on-quarter (q/q) it marked a 4.7 per cent decline from Q2 levels on a stand-alone basis.

Though gross income increased for First Bank of Nigeria Limited (FirstBank) from N213.8 billion in the corresponding period of 2012 to N239 billion, profit declined by 7.4 per cent from N75.7 billion to N70 billion in the third quarter of 2013.

For Access Bank, the unaudited results made available on the floor of the Nigerian Stock Exchange (NSE), showed its gross earnings stood at N154 billion at the end of September 2013.

It, however, showed the bank's profit before tax fell by 10.26 per cent to N35 billion as at September 2013, compared to the N39 billion in the comparable period of 2012.

The bank's operating income also declined by 7.96 per cent to N104 billion during the period under review, from N113 billion in September 2012. However, its operating income improved by four per cent from N34 billion in the second quarter, to N35 billion in the review period.

UBA Q3 results also showed a profit before tax decline by 14 per cent to N10.2 billion due to a 21 per cent reduction in non-interest income to N16.7 billion and an 11 per cent rise in operating expenses to N28.6 billion.

Meanwhile, Skye Bank Plc's gross earnings rose to N102 billion at the end of the period as against the N94 billion it realised in the corresponding period of 2012.

But its profit before tax also declined to N14.562 billion at the end of September 2013, from the N16.549 billion it realised in the comparable period of 2012.