Story by Kayode Tokede
Analysts at Cordros securities said banking industry gross earnings expanded by 6.8per cent year-on-year (y/y) to NGN2.36 trillion in half year (H1) ended June 30, 2019.
The Lagos based company in its “resilience will be tested as risks rise” said the performance was driven by Tier- 1 banks, which recorded a stronger growth of 7.6per cent y/y to N1.86 trillion relative to the 3.9per cent y/y growth to N502.17 billion recorded by Tier-2 banks.
According to Cordros report, the top-line growth was supported by interest income growth, which settled higher at 5.8per cent y/y to N1.68 trillion and contributed 71.1percent to gross earnings.
The report disclosed that interest income growth was supported by growth in income from investment securities (+18.6per cent y/y to N611.13 billion), just as income from loans to customers pared (-three per cent y/y to N932.52 billion).
“The weak growth in income from loans and advances was expected, especially in light of the marginal growth in loans and advances in the sector,” the report explained.
According to the report, interest expense growth outpaced income growth and settled 8.5per cent higher yoy at N694.15 billion, as pressure was exerted on borrowing costs given high interest rates, while increasing competition for customers deposits also contributed to the upward pressure.
“This was noticeable across the sector as pressure was exerted on both Tier-1 and Tier-2 banks, which recorded expansions of 8.6% y/y and 8.3per cent y/y to N507.97 billion and N186.18 billion respectively. Given that yields are trending upwards, we expect interest expense to remain elevated through the rest of 2019.”
On Industry loans, the report disclosed that banking sector loan books expanded by 4.9per cent YTD to N15.81 trillion, increasing by 2.1ppts from Q1- 19 when loans had grown by 2.8per cent, as banks extended loans given the Central Bank of Nigeria (CBN’s) directive on minimum Loan-to-Deposit ratio (LDR).
“Deposits from customers expanded at a faster pace than loans, settling 9.1per cent higher YTD at N28.10 trillion. Consequently, the average LDR for the sector settled at 61.6per cent. Given the new directive, we expect loans to customers to expand going towards 2019 financial year,” the report by Cordros capital explained.
The report stated that the trend of non-performing loans (NPL) has been positive, as industry NPLs declined from 14.8per cent in 2018 to 9.6per cent as of June 2019.
According to the report, Stanbic IBTC Holdings recorded the lowest NPL (3.9per cent) at the end of the period, which was marginally up by 0.05ppts from FY-18 and driven by deterioration in the bank’s Agriculture sector exposure (H1-19: 23.7per cent; 2018: 5.9per cent).
“Also, FBN Holdings recorded the largest NPL (14.5per cent) in the sector.”
The management of FBN Holdings stated that, “we note the significant decline in the period from 24per cent at 2018 financial year, as the bank completely wrote-off its largest impaired exposure — Atlantic Energy.”
“While the recent positive trend for the sector may be maintained through the rest of 2019, we are cautious about our outlook for NPLs given the expectation of increased risk asset creation in the face of the LDR policy action which will induce continuous credit extension. In our view, given the weak macroeconomic environment and the risk of economic pressure over the short-term, there might be an uptick in NPLs in 2020,” he said.
Furthermore, the report said Industry Capital Adequacy Ratio (CAR) settled at 19per cent at the end of the period relative to 18.5per cent and 20 percent in the prior quarter and 2018 respectively.
“In recent times, the CBN governor has referred to the possibility of boosting capital levels in the industry to drive risk asset creation. However, in our view, the industry is adequately capitalized for growth, although we acknowledge that some banks may require a debt raise over the short to medium-term to adequately drive business growth.
“Also, further contextualizing with the industry liquidity level of 45 percent, it implies that the industry has the headroom to drive risk asset creation.
“At the end of the period, Guaranty Trust Bank plc was the most capitalized bank, with a CAR of 28per cent relative to industry and Tier-1 averages of 19.4per cent and 21.1per cent respectively, while the lowest relative to the statutory limit for categories’ (i.e. D-SIBs, International, and National banks) was FBNH with a CAR of 15.6per cent relative to the statutory limit of 16per cent for DSIBs.
“We note that after capitalization of H1-19 earnings this figure would have been 16.8per cent”.