Tier-1 Banks Record Modest Q3 Growth amid Shrinking Economy

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Though Nigeria’s economy slowed down in the second quarter, the banking sector of the economy seems to know the way out as a few tier-one banks that have churned out their third quarter financial results recorded modest bottom-line growth despite marginal earnings growth. Bamidele Famoofo presents the scorecard

Economic Review

Prospect for sustainable economic growth in Nigeria became doubtful at the end of second quarter ended June 30, 2018 when Gross Domestic Product (GDP) dropped from 1.95 per cent in first quarter to 1.5 percent with projections for ambitious growth been lowered by economic experts.

Economist and Head of Research, Sub-Saharan Africa, Renaissance Capital, Yvonne Mhango, said the slowdown in Nigeria’s Year-on-Year (YoY) growth to 1.5 per cent in 2Q18 was partly due to a 4.0 per cent contraction in the oil sector, which masked stronger non-oil sector growth. “It is notable that the biggest non-oil sectors – crop production, wholesale and retail trade and manufacturing – underperformed. We believe this is in part due to a weak consumer”.

Just like did the World Bank which cut growth projection for Nigeria to 2.1 per cent in 2018, Renaissance Capital said due to trade’s protracted slump and the sharper-than-expected slowdown in crop production, the peaking of oil production, and the weak consumer’s cap on manufacturing, “we lower our 2018 growth forecast to 2.0 per cent from 2.9 percent previously. We also lower our 2019 forecast to 2.5 per cent instead of 3.0 percent.

Access Bank

Access Bank Plc increased its top line earnings for the nine months ended 30 September 2018 by three per cent to N375.2 billion from N365.1 billion recorded during the corresponding period in 2017.

The bank’s profit after tax (PAT) increased 12 per cent to N62.9 billion from N56.4 billion of which subsidiary contribution increased to 32 per cent from 15 per cent from the corresponding period.

The asset base of the bank remained strong and robust with growth of 11 per cent year-to-date (YTD) in total asset to N4.55 trillion in September 2018 from N4.10 trillion in December 2017. Loans and advances totaled N2.08 trillion as at September 2018 (December 2017: N2.06 trillion).

Customer deposits increased by 10 percent to N2.48 trillion in September 2018, from N2.25 trillion in December 2017 while Capital Adequacy of 20.3 percent and liquidity ratios of 44.2 percent, remained consistently above the regulatory minimum requirement.

Commenting on the result, Group Managing Director/CEO, Herbert Wigwe, said: “Our capital and liquidity position remained adequately above regulatory levels, as we continued to implement a disciplined capital plan, ensuring sufficient levels of profit retention to support our growth. We remain committed to our cost containment plan, as we strive to balance operational efficiency with earnings growth in a constrained environment.”

Guaranty Trust

Guaranty Trust Bank Plc recorded a post-tax profit of 11 per cent year-on-year for Q3-18, but it dropped 8 per cent on a quarter-on-quarter basis to N46.64 billion. Gross earnings for the quarter stood at N110.59 billion, 16 percent above similar period last year, but 6 per cent lower compared to the previous quarter. Interest income declined in the quarter by seven per cent quarter on quarter, as against the marginal growth recorded in Q2. Also, interest on customer loans dropped by four percent q/q, amidst the continued decline in the bank’s loan book.

Meanwhile, growth in non-interest income for the quarter turned negative, dropping six per cent, while net fees & commission income increased by four per cent.

On the positive, loan recoveries in the quarter led to a net gain in loan impairment charges, even as the bank’s loan book (-2 per cent q/q) continued to contract. Also, NPL ratio decreased to 5.57 percent as against 7.66 per cent in the preceding period. It is also worth stating that the continued decline in loans (-12per cent YtD), coupled with sustained increase in deposits (+9per cent), has contributed to the decline in loan-to-deposit ratio to 48.21 percent compared to. 58.91 percent in financial year ended December 2017.

Zenith Bank

Zenith Bank Plc grew profit by 12 per cent to N144.18billion in during third quarter ended September 30, 2018. EPS growth of 16 percent year-on-year, 80 percent quarter on quarter to N1.99 per share was recorded. But following industry trend, gross earnings only increased by one percent, largely on the back of the 11 per cent growth in interest income to N110.39 billion. Interest earned on customer loans stood at 8.35 percent y/y. Also income from government securities, which grew by 44 percent y/y was another major driver of earnings

On the other hand, decline in fees & commission income (-30per cent y/y, -10per cent q/q) led to a disappointing NIR (-18per cent y/y, -37per cent q/q) performance in the quarter. Over the 9 months period, NIR dropped 20per cent, with trading income, other income, and fees and commission income all recording respective negative growth of 35, 24, and 1 percent respectively.

Total impairment charges in the quarter were relatively flat, as it dipped 0.79 per cent y/y. A nine per cent decline in gross customer loans, annualised cost of risk for the period printed at 0.93 per cent as against 2.8 per cent in Q3-17. It is also worth stating that gross loans dipped further by two percent, compared to the figure in half year 2018 as obligors continue to pay down what they owe.

While cost to income ratio for the quarter inched up 200 bps y/y to 45 per cent, according to Cordros Capital, it was much lower than the 53 per cent recorded in half year.

“It is worth stating that the bank recorded a tax credit of NGN2.5 billion in Q3-18, owing to deferred tax asset recognition in tax expenses during the period. Further clarification on the item will be obtained upon our meeting with management. Nonetheless, the tax credit gave the boost to the bank’s earnings, as pre-tax profit was down 0.7per cent y/y in the quarter”, Cordros Capital hinted.

Union Bank

Union Bank, one of Nigeria’s longest standing financial institutions, was able to grow its earnings by 12 percent, a feat others could not achieve in the review period. According to the bank, the growth was made possible by higher earning assets and a 46 per cent growth in non-interest income.

Profit before tax was up 14 per cent to N14.9billion compared to N13.0billion in Q3 2017 while net interest income before impairment also increased by five per cent to N49.4billion.

Non-interest income: up 46 percent to N30.8billion (N21.0billion in Q3 2017); a result of intensified recovery efforts, continued improvements in alternative channel revenues and treasury trading gains.

Union Bank grew Net operating income by 17 percent to N72.8billion from N62.0billion in Q3 2017 as operating expenses jumped by 18 per cent to N58.0billion from N49.0billion in Q3 2017; driven mostly by a 28 per cent increase in regulatory levies.

Gross loans were up five per cent to N588.9billion as against N560.7billion in December 2017, as customer deposits increased by 10 per cent to N882.2billion, showing a 37 per cent increase in foreign currency deposits (excluding impact of devaluation) alongside a growing low-cost deposit book. Commenting on the results, Chief Executive Officer of Union Bank, Emeka Emuwa, said: “In the third quarter of the year, our numbers continue to track strongly across all performance metrics. The group’s gross earnings grew by 12per cent to N122.2 billion from N109.5 billion in Q3 2017. Profit before tax (PBT) is up 14per cent to N14.9 billion compared to Q3 2017 as a result of strong treasury trading income, intensified recoveries and a 144per cent growth in alternate channel revenues.

Also, Chief Financial Officer, Joe Mbulu , said: “Notwithstanding our deposit book growth, our focus on optimising our funding costs ensured that they remained flat year-on-year. This drove profitability from gross revenues to the bottom line, with higher net revenue from funds (after impairment) in the period”.

Moody’s Report

A recent report from Moody’s on Nigeria banking system outlook maintains a stable outlook for the Nigerian banking system, based on the expectation that foreign currency liquidity risks will continue to stabilise over the next 12 to 18 months, supported by recovering global oil prices and a more liberal foreign exchange market.

“However, we expect banks’ earnings to come under pressure and capital metrics to decline marginally over the same period. Additionally, asset quality will remain weak, but further deterioration in loan performance will be marginal as operating conditions slowly improve”.

The report, which says the economy will recover slowly, forecast a continued recovery in real GDP growth over the next two years, up from 0.8 percent last year.

Moody’s says banking lending growth will rise to around 10 per cent after a 15.4 percent contraction in 2017. “Though declining, inflation remains high, but will continue to gradually subside as liquidity in foreign-exchange markets continues to stabilise”.

The report also noted that asset risk will remain high while Non-performing loans (NPLs) will increase marginally in a delayed response to sluggish economic growth in 2017. We expect banking system NPLs to range between 15.5per cent and 18per cent over our outlook period (15.1per cent at 3Q2017, IMF). Concentrations of loans to single names (e.g. 9mobile) and single sectors continue to aggravate asset risk for the banks. Capital buffers will decline moderately. We expect tangible common equity for the sector to decline to around 15.5 percent over 2018 from 17.3 percent driven by the introduction of new IFRS 9 accounting standards.

“Liquidity buffers will remain resilient. Nigerian banks are mostly funded by steady inflows of local currency deposits. Dollar shortages have eased and we expect liquidity to remain stable given our global oil price forecasts ($45-$65/barrel) and the introduction of a more market-driven foreign exchange market that has attracted foreign-currency inflows”.

According to Moody’s, declining yields on government securities will dampen banks’ core earnings. “We expect return on assets of around 2per cent in 2018 (2.4per cent at 3Q17, IMF) due to declining yields on government securities. Declining yields will be partially offset by increased non-interest income and lending growth. Additionally, some banks will continue to generate high earnings through derivative and swap transactions, although we expect these earnings to decline significantly over the next 12 months. We continue to expect a high likelihood of government support for the largest banks, given the significant consequences of a bank collapse to both the payments system and the wider economy.”