The relative high yields on government securities have created an environment for Nigerian banks to grow net interest income (NII) without creating new risk assets, analysts at Renaissance Capital have said in a banking sector update obtained by Businessamlive.
The analysts in a sector update titled, “Nigerian banks survival of the fittest”, released Tuesday, explained that credit growth in Nigerian banks have been declining in the past two years, adding that year-to-date, credit has declined 1.5 percent on average.
“Credit growth across the sector has been weak, with the banks in our coverage recording an average YtD decline of 1.5 percent.
“We believe the relatively high yields on government securities have created an environment for banks to grow NII without creating new risk assets; yields on government treasury bills currently hover around 19-22 percent,” they noted.
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Examining the banks’ net interest margin (NIM) trends, they contend that Stanbic IBTC, GTBank, and FBNH have been the biggest beneficiaries of the high interest rate environment.
“GTBank’s NIM of 10.1 percent in 1H17, on our estimate, is currently the highest in our coverage universe, as the bank has benefited significantly from treasury bill yields, while managing to control its funding costs,” they said.
Representatives of the manufacturing sector of the economy have been complaining that the private sector has been crowded out from the loans market by government borrowings, saying that the resultant effect of banks chasing easy profit from government securities may kill the productive sectors of the economy.
Muda Yusuf, Director General of the LCCI earlier in May said the high yield regime of government securities was having negative impact on productive activities as it discourages both lenders and investors from putting their money in productive activities considering the risks and challenges of the operative business environment.
“They now have increased appetite for government securities, which may cannibalise private-sector credit,” an analyst told businessalive.
The relative risk-averse position of the banks is equally attributable to increasing ratio of non-performing loan (NPL), which according to data from the Central Bank of Nigeria (CBN) increased to 15.2 percent in May 2017, from 13.6 percent in February 2017.
“With the exception of FBNH and GTBank, YtD NPL trends for the banks in our coverage universe have deteriorated,” the RenCap analysts pointed out, adding that big-ticket loans and weakness in the risk management framework were the cause of pressure on the NPL books, citing FBNH’s major troubled loan, Atlantic Energy, which represents about five percent of its loan book.
The RenCap analysts also noted that banks that are more exposed to the retail and SME segments have been adversely affected, saying that Stanbic and FCMB which have the highest exposure to the retail segment at about 35 per cent and 29 percent, respectively, have the highest NPL ratios (excluding FBNH) in the sector.
“This is not surprising given that the retail segment and SME segments of the loan book were adversely affected by staff layoffs, FX scarcity and the impact of naira devaluation,” they stressed, adding however that Stanbic IBTC is a lot more proactive than many of its peers when it comes to recognising NPLs. In other words, it typically recognizes NPLs well before its peer group.
They noted that a common trend in the 1H17 numbers as released by the banks was the quarter-on-quarter spike in impairment charges, driven by the telecommunications and transportation sectors and largely from two high profile names, Arik Air and 9Mobile (formerly Etisalat Nigeria).