By Obinna Chima with agency report
Nigeria's banks are likely to face profit squeeze this year as a result of monetary policy measures aimed at helping the economy and making financial institution to lend more to domestic businesses and consumers.
According to Reuters, some banks are already looking at lending to power projects and advisory work on energy deals to try to compensate for the drop in earnings in their recently released third quarter results.
The banking sector, which was bailed out in a 2009 financial crisis, had been making bumper profits by mopping up government deposits and using the cash to buy high-yielding treasury bonds. As a result, the banks have had little incentive to lend to Nigeria's real economy.
But bank lending was mainly to government or multinationals rather than to domestic businesses or retail customers. This was partly because banks have been making easy money by paying one or two per cent interest for holding government deposits and using the cash to buy government bonds yielding around 14 or 15 per cent
To this end, the Central Bank of Nigeria (CBN) in July raised the cash reserve requirement (CRR) for the public sector deposit from 12 per cent to 50 per cent. The hike in the monetary policy instrument is already putting pressure on bank earnings.
In fact, Reuters said a number of banks had been advising oil and gas deals in the country, with several asset sales by oil majors to local buyers in the works.
It also disclosed some banks are also lining up to finance power projects following the power assets privatisation.
United Bank for Africa Plc (UBA), with operations in 19 African countries, has spent $700 million in financing power assets this year and plans to put $2 billion into power projects in the next three years.
Fidelity Bank, Access Bank and Guaranty Trust Bank have raised $1 billion in total in Eurobonds for the power sector and oil and gas lending.
First Bank of Nigeria on Tuesday announced plans to diversify earnings with the acquisition of ICB's West African banking assets, with retail customers on the radar.
"The directive by the central bank will continue to have a negative impact on banks' ability to create earning assets," said an analyst at Ecobank, George Bodo, adding that he expected fourth quarter bank earnings to decline by 10 percent.
Bodo also said the next phase would be consumer lending. "Nigerian banks will have to start consumer lending. Their current lending model is not sustainable at all," he said
Banks' holdings of government deposits were about 10 percent of total deposits and 25 to 30 per cent of total loans before the CRR hike, according to central bank data.