Nigeria’s top lenders score high on return on equity in sub-Saharan Africa

Despite a pervading rise in non-performing loans and thinning interest margins, Nigeria’s top lenders are doing relatively well more than their peers on the continent as average return on equity stands at 22.3 percent as at March 2017, according to data complied by Bloomberg. This compares with an average of 17.4 percent for South Africa’s four biggest lenders and 23 percent for Kenya’s biggest lenders.

Banks are generally facing a new era of lean profits orchestrated by weaker interest income, growing non-performing loans and strains on non-interest income despite rising impairment charges.

The industry environment is also contending with a growing number of non-bank financial intermediaries in the form of fintech companies, which has pressured margins.

However, the relative performance of Nigeria banks could be traced to huge cut backs in operating expenses and a relative high MPR, which makes the yield environment quite attractive. That is a higher MPR implies a higher rate on loans and improved yields on fixed income securities, which in turn will increase the overall rates on interest yielding assets. However, rising NPLs and the general down turn of the economy in the past one year have moderated incomes, which are expected to look north with the recent positive indices about the economy.

Specifically in 2016, return on equity by seven selected quoted banks averaged 15 percent with Guaranty Trust Bank registering the highest ROE at 28.80 percent, followed by Stanbic IBTC at 21.14 percent. Zenith Bank return on equity was 19.96, UBA, 18.51 and Access 17.38.

The underperformers were Ecobank Transnational Incorporated (ETI), which had -10.11%, FBNH 2.95 percent and Union Bank 5.94 percent.

On the continent, Kenyan banks are being constrained to adjust their business models to adapt to a new era of lower profits as interest-rate caps are curbing investor returns, according to Patrick Njoroge, Central Bank of Kenya governor.

“Return on equity in the Kenyan banking industry declined to 13.6 percent in March from 18.2 percent in June,” Njoroge told reporters Tuesday in the capital, Nairobi, adding that for the country’s biggest lenders, the drop was more severe, slumping to 23 percent from almost 35 percent.

Lenders are “entering a world where there will be smaller interest margins,” Njoroge said. “Returns will be much smaller.” The most important market news of the day.

The top five banks in East Africa’s largest economy this month reported a decline in first-quarter profit as the government-imposed cap on commercial lending rates curbed loan income.

The ceiling, set at 400 basis points above the central bank’s official rate of 10 percent, may cut revenue in the industry by as much as 25 percent this year as it scales back on unsecured lending, said Jeremy Awori, Barclays Bank of Kenya Ltd. chief executive officer.

“Banks are still working under the old business models,” Njoroge said, adding “They need to be more forward looking so as to be resilient, because shocks will come and they need to be ready for that.”

By Business a.m. live staff