Dike Onwuamaeze
A report on the Nigerian banking sector has stated that the current phase of rising interest rates in the Nigerian financial market will not pose challenge to the sector.
It also warned that the banking sector should not be complacent to the threat posed by financial technology companies (fintechs) on its profitability and growth.
The report, which was released Monday by Coronation Asset Management (CAM) with the title, “Nigerian Banks, Resilience Built-In,” showed that the Nigerian banking system has been resilient over the interest rate cycle, adding that its profitability has improved over time while the stock values of Nigerian banks have remained remarkably cheap compared to their counterparts in Ghana and Kenya.
It also rated Access Bank, the United Bank for Africa, Guaranty Trust Bank, Zenith Bank, and Stanbic IBTC Bank as stocks to buy.
The report written by Mr. Ope Ani and Mr. Guy Czartoryski of the Coronation Research was based on the sampling of six public quoted banks, namely the Access Bank, the Guaranty Trust Bank, the Zenith Bank, the United Bank for Africa (UBA), the Stanbic IBTC Bank and the First Bank of Nigeria (FBN), which examined what has happened within the Nigerian Banking industry in the last 10 years.
It also noted that the fintechs would be one of the major sources of threat to the overall profitability of the banks because their banking platforms would be attractive to tech-literate customers who do not like visiting their local bank’s branch and could offer much more efficient service than the conventional banks.
It added “Most of the conventional banks we speak with are apparently not concerned with this threat. They see themselves as partners with internet banks, for example offering their customers cash withdrawals and supplying them with clearing service.
“At the same time, they offer their own USSD-based (Unstructured Supplementary Service Data) offerings and therefore compete with internet banks in some areas. Time will tell whether the conventional banks are justified in their confidence, or merely complacent.”
The report stated that growth in the banking sector looked impressive as the total Average Interest Earning Assets (AIEA) of the six banks according to the study, rose by 311 per cent, from N6.5 trillion in 2010 to N26.9 trillion in 2020.
It added: “So far we have established that Nigerian banks are skilled at adapting their businesses to fluctuations in interest rates and good at preserving their Net Interest Margins (NIM) and spreads through the cycle.
“Therefore, the current phase of rising interest rates presents no real challenge to their businesses, in our view. At the same time, and with the significant exception of Access Bank, they have struggled to deliver meaningful balance sheet growth over the long term.”
It, however, added that the good news among the sampled banks “is that things are getting better, with profitability much improved (in all cases except one) during the period from 2016 to 2020 compared with the period 2010 to 2015. Bankers, for the most part, are getting better at making money.”
It pointed out that financial institutions depending on short-term funding in the marketplace, and have relied excessively on duration trades for their asset yields, could face challenges this year.
It attributed the movements of rates to the CRR, which though at 27 per cent could indirectly be as high 50 per cent and warned that, “a banking system can support a high CRR, so long as depositors do not turn up at their banks, all at once, and demand their money, or spend it electronically outside the banking system.”
The report further warned that, “a bank that protects its margins and spreads too much may see its market shares erode.”
It, however, noted that the story looked less impressive when the 311 per cent growth in Average Interest Earning Assets (AIEA) of the six banks within 10 years is matched with their gross loans to the economy that grew by 12 per cent from 2010 to 2020.
“This makes it easy to understand the frustration of policymakers with the lending activity of commercial banks, which are blamed for making insufficient loans to enterprises. This is the rationale for the Loan-to-Deposit ratio policy, which obliges banks to meet certain levels of lending relative to their customer deposits,” it added.
