Banks to Reap Higher Income from Digital Platforms, Says Agusto & Co

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Obinna Chima

Agusto & Co. has predicted that more bank customers would embrace digital banking platforms which could result in higher electronic banking income for the financial institutions.

The pan-African ratings agency stated this in its latest banking sector report.
According to the Lagos-based firm, the full impact of the COVID-19 pandemic on the industry would be difficult to measure in the near term.

It stressed that, these are indeed difficult times for the industry that barely recovered from the recession. But, it noted that despite various identified risks, opportunities exist in the sector.
“For instance, working capital needs of companies in key economic sectors will increase because of the naira devaluation and higher inflation, presenting prospects to grow loans to obligors with good business fundamentals in resilient economic sectors.

“We expect more bank customers to embrace digital banking platforms which could result in higher electronic banking income for banks. Furthermore, banks can leverage intervention funds provided by the CBN to susceptible sectors during this pandemic to grow loans. The Nigerian banking industry remains resilient and we expect this narrative to remain,” it stated.

According to Agusto & Co., non-interest income accounts for approximately 42 per cent of the industry’s net earnings, largely driven by electronic banking activities, account maintenance fees, credit related fees and securities trading income.

It pointed out that with the lockdown resulting in skeletal operations, banks have leveraged their electronic banking platforms to boost income as more banking transactions are only consummated through digital channels during the lockdown period.

“However, minimal trade activities will moderate credit related fees. We expect some correspondent banks to pull back on their lines of credit. We also anticipate repricing by correspondent banks to reflect the elevated credit risks emanating from lower liquidity in the foreign exchange market.

“Outstanding obligations to foreign portfolio investors seeking to exit Nigeria stood between $700 million and $900 million as at April 2020. The regulatory induced reduction in bank charges which became effective in January 2020 will also moderate non-interest income.

“Nonetheless, expected revaluation gains from a further devaluation of the domestic currency will support the earnings of banks with net foreign currency assets positions. With expected pressure on revenue generation, cost containment will be top burner in 2020.

“While the Industry’s operating costs are expected to increase on account of a rise in inflation and a growth in foreign currency denominated costs (such as technology-related expenses), we believe that cost management strategies will be paramount to sustained profitability.

“Nonetheless, Agusto & Co expects the Industry’s pre-tax return on average equity (ROE) to moderate to between 12 per cent and 14 per cent in 2020 unless regulatory support is granted in some areas such as reduction in cash reserve requirement (CRR).

The report predicted that earnings from the industry’s core business would decline in the short term on account of an expected rise in impairment charges, lower yields on the loan book and a contractionary monetary policy stance, exacerbated by discretionary CRR debits by the regulator.

It revealed that the interest rate on federal government’s intervention funds (granted through the Bank of Industry and the Central Bank of Nigeria) to targeted sectors, which account for about 10 per cent of the loan portfolio was reduced by 400 basis points to five per cent in March 2020, as part of the palliatives to support businesses. This translated to a 300 basis points decline in yields on such loans for banks.

Officially, the CRR for banks is 27.5 per cent. However, the effective CRR for some banks are as high as 50 per cent due to the CBN’s non-refund policy and the discretionary excess debits seen in the last few months.

Penalties for breaching the minimum loans-to-deposit ratio (LDR) implemented as additional CRR debits also contributed to the spike.

“Thus, restricted funds with the CBN account for as high as 15 per cent of total assets and are non-earning. In February 2020, the CRR for merchant banks was raised to 27.5 per cent, from two per cent. Assuming the CBN were to normalise CRR to 10 per cent of total assets; it would need to release about five per cent of total assets.

“If these funds were granted as loans to the low risk names in the private sector at an average of 14 per cent per annum, this would add N300 billion to the Industry’s projected pre-tax income which translates to an additional 0.8 per cent to our forecasted pre-tax return on assets.

“Based on our expectations that the Industry’s interest income will moderate and that funding costs will remain elevated owing to the high effective CRR and a possible increase in the prevailing interest rates, we foresee a decline in the Industry’s net interest spread by up to 500 basis points in 2020,” it added.