Amid Tough Operating Environment, Banks’ Interest Expense Reached N741.4bn in H1

Kayode Tokede

On the backdrop of a high operating environment, a total of 13 Deposit Money Banks spent a whopping sum of N741.4 billion in interest expenses on customers and borrowings in the half year ended June 30, 2022, THISDAY analysis of the banks’ financial results has revealed.

This is an increase of 30.4 per cent from N568.6billion reported in the corresponding half year of 2021.

The 13 DMBs are: Zenith Bank, Access Holdings, United Bank for Africa (UBA), Guaranty Trust Holdings Company Plc (GTCO), FBN Holdings Plc and Ecobank Transnational Incorporated (ETI).

Others are:  FCMB Group, Wema Bank, Stanbic IBTC Holdings, Sterling Bank, Union Bank of Nigeria, Fidelity Bank and Unity Bank. 

Nigerian DMBs in the period under review accessed high-cost funds from individual/corporate deposits, and also lend the same to customers at a higher rate, attributable to the Central Bank of Nigeria (CBN) increase in its Monetary Policy Rate (MPR).

MPR opened in 2022 at 11.5 per cent and it increased to 13 per cent as of June 2022, making borrowing prices the highest since April 2020.

 The rate was further increased to 15 per cent in a move to manage inflation rate that has ravaged global economy but likely still not enough.

As published on CBN’s website, DMBs had paid customers an average interest rate of 1.38 per cent as of June 2022 from 1.25 per cent it opened the year for saving with them and also lend to customers at an average rate of 12.29 per cent for prime lending compared to 11.68 per cent recorded in January, applicable rates for each of the DMBs as at June, 2022.

The high operating environment also hike DMBs cost of funds in the period under review as most leading banks suffered the most.

Cost of funds refers to the amount spent by a lending institution to acquire funds to lend to customers.

According to THISDAY investigation, Access Holdings reported one of the highest interest expenses on customers’ deposit and borrowing in the period, followed by ETI.

Access Holdings in the H1 2022 reported N174.8billion interest expenses, representing an increase of 46.07 per cent from N119.67billion in H1 2021, while ETI’s interest expenses hits N111.66billion from N97.97billion reported in H1 2021.

Access Holdings’ average Cost of Funds increased to 3 2 per cent from 2 9 per cent in H1 2021 as interest rates have risen sharply in the second quarter of 2022 (Q2) in conjunction with the slow devaluation of the naira, contributing to increasing cost of deposits,

The reported cost of funds by Access Holdings is one of the highest in the banking industry as of June 30, 2022.

Commenting on the hike interest expenses, the Group Managing Director, Access Holdings, Dr. Herbert Wigwe had explained that, “Today, we represent the largest bank in the country in terms of balance sheet size. The only other bank that comes close to us as far as savings accounts is concerned is First Bank for instance.

“And the change in the monetary policy rates of the central bank and what that has done is that it has  increased the average interest rate that people have to pay or that we have to pay with respect to savings  accounts.”

He added that, “Finally, we’ve had to basically reprice some of our deposits given what we saw as an increasingly inflationary environment. So, all of those things affected our cost of funds in the short term. But if we take institutions that have the same type of savings accounts like us, I think a 20 basis points increase in cost of funds is typically what you would have seen.

“But in the long term all of these things will normalise, given our size and scale, and the fact that as the economy basically settles or grows, the current monetary policy stance will change and the full impact of what we’re doing will be brought to bear as far as profitability is concerned.”

As UBA reported N79.9billion interest expenses on Deposits from customers and borrowings in H1 2022 from N75.56billion in H1 2021, FBN Holdings announced N73.44billion interest expenses in H1 2022, representing an increase of 28.4 per cent from N57.2billion in H1 2021.

In addition to Tier-1 banks’ interest expenses, GTCO reported N26.35billion in H1 2022, representing an increase of 38.4 per cent from N19.04billion in H1 2021.

GTCO attributed the 38.4 per cent growth in interest expense  to an increase in Cost of Funds from 0.7per cent in H1-2021 to 1.0per cent in H1-2022 on account of demand for higher interest rate by depositors.

According to the financial institution, “The Group made cost savings from Interest saved on FCY borrowings due to continuous utilization of the Group’s dollar liquidity to repay maturing FCY borrowings.

“Overall, the Group was able to keep its Cost to Income Ratio (CIR) at 49.1per cent from 49per cent in H1-2021, though, higher than the guided 35per cent ratio owing to Inflation induced growth in variable and fixed costs element. The Group remains committed to effectively managing its cost despite inflationary and revenue pressures in order to remain within the FY 2022 guidance.”

Analysts said the increase in MPR created room for a hike in interest expenses banks paid on customers’ deposits and borrowing from other banks, leading to economic distress.

Speaking with THISDAY on hike in DMBs interest expenses, the Vice President, Highcap securities, Mr. David Adnori noted that the increase is a reflection of economic challenges and that banks do not operate in isolation.

He noted that banks customers were looking for where the interest rate is high and at the same time, DMBs were borrowing at a high-interest rate in a move to remain in business.

He added that DMBs had to adjust to the hike in MPR and restructure some loans so as to not to allow them to become Non-Performing Loans (NPLs).

THISDAY discovered that Wema Bank reported one of the highest percentage increases in interest expenses in the period.

One of the oldest banks in Nigeria reported N27.24billion interest expenses on deposits from customers and other borrowed funds in H1 2022, an increase of 77 per cent from N15.39billion reported in H1 2021.