State of banks: Struggle for market control heightens

Kindly Share This Story:

Nigeria's foreign reserve still strong, says CBNIn the past five years, the banking sector has been recording sizeable growth and profitability. But the growth is skewed in favour of the big banks, also called Tier-1 banks. The smaller banks (Tier-2 banks) are struggling for a share of the market. COLLINS NWEZE examines the performances of the lenders in terms of asset quality, lending strength and market control.

NOT a few customers are shocked by the fall of Skye Bank Plc and news of a likely takeover of Diamond Bank Plc by Access Bank Plc, notwithstanding repeated denials by both leader of the acquisition report.

However, to those monitoring developments in the sector in the past five years with keen interest, the likelihood of such acquisition is not surprising.

In times past, Diamond Bank was a leading commercial bank within the Tier-1 category, competing favorably with Zenith Bank and GTBank. But today, its (Diamond Bank’s) performance has dropped, pushing the lender to Tier-2 category. Its biggest undoing has been its level of Non-Performing Loans (NPLs) which stood at 14.7 per cent in the first half of this year as against five per cent regulatory benchmark.

Still, there are other lenders with worse NPLs. FBN Holdings NPLs stood at 22.8 per cent within same period; Union Bank (19.8 per cent); Ecobank (10.8 per cent); GTBank (7.7 per cent); United Bank for Africa NPL (6.7 per cent); Fidelity Bank (6.4 per cent) and Sterling Bank (6.2 per cent), among others.

The problems with the banking sector have been on since early 2015 when over N800 billion of capital was trapped in loans to power, oil and gas sectors following the downturn in the economy and drop in crude oil prices.

The power sector investment followed a directive by the government but today, the investment is at risk as operators struggle with cash crunch and low gas supply, making it difficult for them to meet their obligations.

Besides, the removal of commission on turnover by the Central Bank of Nigeria (CBN) is costing the banks more than N120 billion annually on revenues. The banks’ contributions to the Asset Management Corporation of Nigeria (AMCON) and Nigeria Deposit Insurance Corporation (NDIC) levies is estimated at N150 billion annually; implementation of Treasury Single Account (TSA) and high Cash Reserve Ratio (CRR), are some of the policies hurting banks profitability and liquidity positions.

More worrisome, however, is that many of the electricity generating companies (GenCos) and Distribution Companies (DisCos) earn significantly less than their projected pre-acquisition cash flows due to the government’s inability to resolve tariff and gas supply challenges.

Seeing the state of many of the banks, the CBN-led Bankers’ Committee insisted that although the banking sector is upbeat, declaring nearly N700 billion in profits in 2017, they needed to continue on aggressive debt recovery drives, realise collaterals of non-performing credits as well as get the insurance companies to settle claims relating to insured debts.

The committee believed that such steps were needed to get many of the lenders back on track. The banks are also expected to strengthen risk management practices and strictly enforce the CBN restrictions on payment of dividends by banks with high Non Performing Loans (NPLs).

How the banks stand

Fillings by many of the banks released by Afrinvest West Africa, an investment and research firm, showed that total assets of the banking sector remained strong and rose from N25.1 trillion in 2013 to N29.1 trillion in 2014. The assets also grew to N29.7 trillion in 2015; N33.9 trillion in 2016 and N37.8 trillion in 2017. The banking assets hit N38.1 trillion in the first half of this year.

Further data showed that total deposits from the sector rose from N16.2 trillion in 2013 to N18.4 trillion in 2014. By 2015, the figure rose to N19.2 trillion and to N23.5 trillion in 2016. The figure for last year stood at N25.5 trillion and N25.4 trillion in the first half of this year. The deposits are projected to hit N26.7 trillion by this year-end.

Also, the industry total loans based on company reports, rose from N8.7 trillion in 2013 to N11.8 trillion in 2014. By 2015, the loans stood at N12.2 trillion, N18.4 trillion in 2016 before dropping to N17.9 trillion in 2017. The loans stood at N16 trillion in the first half of this year and are expected to close the year at N16.4 trillion.

Further analysis showed that Tier-1 banks cornered 73 per cent of the loans in 2013; 69.9 per cent of the loans in 2014; 70 per cent in 2015 and 77.4 per cent in 2016. The figures rose to 77.8 per cent in 2017 while half-year 2018 figure stood at 80 per cent.

This implies that majority of the lending done in the sector were carried out by Tier-1 banks otherwise called the bigger banks which include GTBank, Zenith Bank, United Bank for Africa (UBA), Access Bank, FBN Holdings and Ecobank Nigeria.

The industry’s Capital Adequacy Ratio (CAR) for the Tier-1 banks showed that Access Bank CAR stood at 20.1 per cent last year and 20.8 per cent in the first half of 2018; Ecobank Nigeria (26.9 per cent/28.5 per cent); FBN Holdings (17 per cent/18.1 per cent); GTBank (25.7 per cent/ 22 per cent); United Bank for Africa (25.5 per cent/ 23 per cent) and Zenith Bank (27 per cent/21 per cent) within same periods.

The Tier-2 banks CARs which include Diamond Bank stood at 16.7 per cent/16.6 per cent in 2017 and first half of 2018; First City Monument Bank (16.9 per cent/18 per cent); Fidelity Bank (16 per cent/17 per cent); Stanbic IBTC (23.5 per cent/27.4 per cent); Sterling Bank (12 per cent/ 12.1 per cent); Union Bank (17.8 per cent/18.2 per cent) and Wema Bank (14.3 per cent/13.3 per cent) in the period under review.

The CAR is the ratio of a bank’s capital to its risk. The CAR for banks’ with offshore subsidiaries is 15 per cent minimum requirement (which rose to 16 per cent by March 1, 2015 for systemically important banks). The CAR for banks operating only in Nigeria is 10 per cent.

Gross earnings for the entire banking industry stood at N2.9 trillion in 2013; N3.3 trillion in 2014; N3.4 trillion in 2015; N3.9 trillion in 2016 and N4.6 trillion last year. Half-year 2018 gross earnings stood at N2.3 trillion and it is expected to rise to N4.7 trillion by year-end.

Speaking on the developments in the industry, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said the banking sector proceeded into 2017, on the back of successive years of growth in revenues and earnings. “With economic conditions deteriorating, the expectation was that the industry was entering a low-growth phase when strong Return on Equity (ROE) performances of the past would fade away. However, the industry remains resilient in the face of significant pressure as the economy entered a downturn,” he said.

According to Chioke, many commercial banks will restrict lending plans ahead of the 2019 general elections as they are already cutting loans to key sectors of the economy, due to the need to reduce the political risks and ensure safety of their funds.

He said the banks are afraid of taking risks with their funds due to past bad experiences.

Chioke said that banks’ ROE rose as revenue and profits accelerated, while banks’ capitalisation was stronger, with average capital adequacy ratio rising to 20 per cent in 2017 from 18.4 per cent in the previous year.

However, despite improving micro-economic fundamentals, banks’ asset quality deteriorated, further in 2017, with industry non-performing loans increasing to 9.3 per cent.

He said the financial performance of the sector was driven by the tight monetary policy of the CBN, which with its overreaching responsibility for price stability, kept rates high and system liquidity low, by conducting consistent open market operations.

“Consequently, at the start of the years, banks were able to lock in high yield investments, which crowded out private sector borrowing, while in the latter part of the year, market volatility allowed some operators to record substantial trading gains,” he said.


Kindly Share This Story:

Related Post

Leave a Reply

Your email address will not be published. Required fields are marked *

amehnews greetings

x
%d bloggers like this: