Nigerian banks, supported by e-banking revenues, bet on rapid economic recovery

Nigeria’s major banks have banked on a rapid economic recovery, restructuring much of their lending portfolios to provide corporate borrowers with more favorable terms, as a pandemic-inspired online banking boom raises non-income income. of interest.

Nigeria’s GDP shrank 6.1% in the second quarter of 2020 after foreclosure measures impacted the economy, while a fall in the naira fueled inflation. Still, banks appear relatively robust, with comfortable capital adequacy ratios and some lenders maintaining interim dividends despite the general uproar.

The number of active bank accounts in the country has increased since the onset of the coronavirus pandemic, and online banking has proven to be a boon to lenders nationwide.

“If the economy continues to [rebound] in 2021, they will be able to maintain their performance, ”said Teslim Shitta-Bey, editor-in-chief of financial reporting service Proshare Nigeria, noting that eight of the 13 Nigerian listed banks reported higher profits this year compared to to 2019.

“We are optimistic that bank core profits and profitability will increase in 2021, especially among Tier 1 banks. Some Tier 2 banks will struggle.”

Nonetheless, the impairments have skyrocketed. Half-yearly impairments of Access Bank PLC more than tripled to N16.5 billion, while those of Zenith Bank PLC rose 74.2 percent to N 23.9 billion and FBN Holdings PLC by 38. , 6% to 30.7 billion naira.

“The write-downs are likely to rise further, but I am optimistic as I doubt the overall impact of the pandemic will be as drastic as we feared in March,” said Jerry Nnebue, equity analyst at CardinalStone, a management company of active in Nigeria’s commercial capital, Lagos. .

Among the banks covered by CardinalStone, lenders have restructured an average of 21% of their loan portfolios.

“This is not a blanket restructuring – borrowers have to meet certain criteria to show that they are a viable business and that they would otherwise be able to repay their loans without COVID-19,” Nnebue said. “Banks are restructuring loans on the assumption of a rapid economic recovery.”

Oil and gas sector

More than a quarter of Access’s 3.550 billion naira loans go to the oil and gas sector, which has been hit by falling energy prices, declining demand and rising naira costs in due to the decline of the local currency.

Of Zenith’s 2.8 trillion naira in loans, $ 3.0 billion – or 41.7 percent – is in dollars, with more than half of its loans to oil and gas companies in US dollars. The hydrocarbons sector also represents 83.3% of its restructured loans.

In its presentation of half-year results, Access Bank warned of asset quality issues, noting that the decline in economic activity has dampened demand for credit and weakened borrowers’ ability to repay. Access also highlights the “high” credit risk of Nigeria’s hydrocarbon sector.

Still, loans to the oil and gas industry have increased this year, Shitta-Bey said.

“The banks are hoping that there will be a V-shaped recovery and in such a recovery you tend to remember your friends who supported you – if the banks don’t continue to support the oil and gas companies now, they will probably move to another bank and never come back, ”said Shitta-Bey.

“Banks want to retain their customers and restructure oil and gas loans, extend term and reduce debt service costs.”

Semi-annual net interest income for some banks fell year over year as lower interest rates affected earnings from investment securities. Access’ fell 10%, FBN Holdings fell 7.4% and Zenith almost stagnated.

Zenith’s non-interest income also rose 6% to N116.5 billion, as higher trading and other operating income more than offset lower commission income.

Digital banking inflates non-interest income

FBN’s non-interest income jumped 46.8% to 80.1 billion naira, driven by digital and mobile banking transaction volumes and value rising by more than 20%, although revenues of online banking have taken a declining share of this revenue due to new regulations that reduce fees by up to 50%. Zenith posted a similar performance, attributing a 24% increase in fees and commissions to a boom in online banking.

Financial inclusion in Nigeria – defined as the number of adults with accounts at a bank or mobile money provider – was lower than the average for the largest countries in sub-Saharan Africa in 2017, according to Bank figures global.

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“The Nigerian banking sector comes from a weak technological base,” said Shitta-Bey. “We have seen more people enter the banking system and make digital transactions, especially in rural communities. People have found it more convenient to use their phones for banking and this is reflected in a lot of bank income. “

These trends are evident in data from the Nigerian Interbank Settlement System, which shows Nigeria had 111.5 million active bank accounts in May 2020, up from 82.5 million in February. But numbers like this don’t necessarily tell a clear story.

“Banks have been aggressive in reactivating dormant accounts, but it’s hard to decipher as account maintenance fees were low in the second quarter due to weak economic activity,” Nnebue said.

“With the foreclosure measures, people had less money to save because the focus was on consumption. The ability of banks to generate income from retail banking depends on broader economic activity rather than on number of active accounts. “

Access’s retail commissions rose 60% year-on-year to N29.3 billion, with debit and credit cards accounting for 42% of total retail banking revenues.

Banks’ net interest margins vary. Access’ lost 280 basis points year on year to 4.9% and FBN was down 70 basis points to 6.8%, while Zenith Bank rose 40 basis points to 9.0%.

The decline in NIMs is a concern, Nnebue said, although banks are benefiting from lower funding costs due to recent adjustments to the minimum savings deposit rate.

“Nigerian banks have the capacity to maintain their recent performance in the second half of the year,” Nnebue said.

“Their big concerns are the low-performing environment, asset quality and unpredictable regulatory actions, which can inhibit earnings growth, as well as a second wave of COVID-19.”

As of October 21, US $ 1 was equivalent to Nigerian naira 381.50.

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