For many banks, the second quarter which ended in June was not a season to cheer about. Their profits dipped. Some are blaming it on the Central Bank of Nigeria (CBN) policies which reportedly cut banks’ loanable funds and income margins. But, what was the magic for those that made profit? COLLINS NWEZE reports.
Capital is key to business. This explains why banks panicked when the Central Bank of Nigeria (CBN) raised Cash Reserve Ratio (CRR) on public sector deposits from 12 per cent to 50 per cent in July, last year. In March, the ratio was raised to 75 per cent.
CRR on private sector deposits also rose by 300 basis points from 12 per cent to 15 per cent during the last CBN Monetary Policy Committee (MPC) meeting in March.
Seeing the effect of previous hikes on banks’operations, the MPC left CRR, Monetary Policy Rate (MPR) and other indicators unchanged at its last month’s meeting. For many banks, especially those with weak deposit base, it was bad business.
These policy adjustments creamed off over N1.5 trillion from banks’ vaults and put it in CBN’s custody. When banks started releasing their fiscal year 2013 results, many pundits were interested in knowing the impacts changes in cash reserve, reduction on Commission on Turnover (COT), removal of Automated Teller Machine (ATM) charges and increase in contribution to the Asset Management Corporation of Nigeria (AMCON) levy had on their profit.
Some of the banks posed good results; other had a poor showing.
The half year ended June 30 result of Skye Bank indicated that its Profit Before Tax (PBT) dropped to N7.266 billion as against N10.545 billion during the corresponding period in 2013. Profit after tax also decreased to N5.786 billion as against N8.428 billion the previous year.
With gross earnings of N63.9 billion, interest expense dropped by 24 per cent yearly to close at N20.7 billion compared to N27.2 billion as at June, last year, in line with the bank’s operational strategy of increasing the volume of low cost funds in its deposit portfolio.
“Our loan impairment charge increased by 100 per cent year-on-year to N5 billion, being a deliberate policy of aggressive provisioning early in the year to enable a fairly sustained position and avoid high-figure concentration in the last quarter. Exchange earnings improved by five per cent to N5.8 billion compared to N5.5 billion of the corresponding period in 2013,” the bank said.
Giving insight on the reasons for poor outing of most banks, Timothy Oguntayo, the new Chief Executive Officer/Managing Director Skye Bank Plc, at a briefing, said the 0.5 per cent sinking fund being contributed to the Assets Management Corporation affects operating expenses.
Fidelity Bank Plc’s PBT for the half year ended June 30, stood at N9.43 billion, its Chief Executive Officer, Nnamdi Okonkwo, has said. The PBT represents a drop of 16 per cent from N11.2 billion recorded in the Half Year ended June 30, 2013. However, second quarter PBT was N4.97billion, which represents a growth of 12 per cent from N4.45 billion recorded in first quarter of the year.
Total Customer Deposits declined by five per cent to N766 billion as at June 30, this year from N806 billion as at December 31, last year as we rebalance our deposit book on account of high Cash Reserve Requirement on public sector deposits and continuous re-pricing of the deposit book.
“On a quarterly basis deposits recorded a marginal growth in second quarter 2014 while interest expense remained flat in a period of increased monetary tightening. Net Loans and Leases grew by three per cent to N438 billion as at June 30, 2014 from N426 billion as at December 31, 2013, loan growth was 19 per cent from June 2013 to June 2014,” it said.
Okonkwo said the result is in line with the lender’s 2014 fiscal year and medium term Return on Equity (ROE) target, adding that the lender’s shareholders’ funds stood at N166.38 billion within the period.
He said the result showed a gradual impact of some of the transformation it commenced at the beginning of the financial year, adding that the PBT rose by 12 per cent in the second quarter and net interest income improved by 32 per cent between June 2013 and June 2014.
“We are confident that the profit and efficiency momentum will be sustained in the coming quarters as we implement our newly tested lending structures, to grow the loan book in the Small and Medium Enterprises (SMEs) and retail segment while consolidating on our niche corporate banking play,” he said. He said the lender’s gross earnings grew by one per cent from N62.9 billion recorded in first half of 2013 to N63.3 billion that of this year.
Also, First City Monument Bank (FCMB) Group second quarter result for the period ended June 30, 2014 showed the PBT grew by 4.6 per cent to N11.14 billion, while PAT rose by 3.2 per cent to N9.6 billion during the period.
FBN Holdings Plc, the holding company for First Bank of Nigeria (FBN) Limited and its previous subsidiaries, grew its top-line by 7.9 per cent to N212 billion in the first half of this year.
Interim report and accounts of FBN Holdings for the period ended June 30, this year released at the weekend showed that gross earnings rose by 7.9 per cent to N212 billion in first half 2014 as against N196.4 billion recorded in comparable period of 2013. The top-line showed mixed performance from the interest and non-interest incomes.
Analysts’ views
Equities analyst at Renaissance Capital (RenCap), an investment and research firm, Adesoji Solanke, said lenders must be disciplined on the cost line, and properly manage their impairment charges before they could deliver earnings growth. He said most banks’ managements acknowledged the current challenges and their initial focus will be on reducing the funding costs by continuous downward re-pricing of costly term deposits.
For Fidelity Bank, Solanke said the lender would be significantly more focused on driving e-banking products for customer mobilisation. On the asset side, he said Fidelity is positioning itself to be a Small and Medium Enterprise-focused bank, and, coupled with its payroll lending retail book, management expects combined exposure to rise to 50 per cent over the medium term (2017), from 28 per cent last year.
He said the bank’s management has also been re-pricing the existing loan book and plans to periodically review all concessions and lending rates. “The turnaround process is under way, but we think in the short term, investors are likely to retain a preference for the more liquid and relatively cheap tier one names,” he said.
Vetiva Capital Management analysts predicted that on an aggregate level, the banking industry 2014 gross earnings would take a potential $690 million annual hit, assuming a 12 per cent yield on the newly sterilised CRR deposits. They said the impact will vary from bank to bank depending on how much public sector deposits on their books.
But Sterling Bank Executive Director, Abubakar Suleiman, disagreed that banks have performed poorly. “If you look around, most banks in Sub Saharan Africa did not do better than 15 per cent Return on Equity (ROE) in 2013. Nigerian banks are averaging 20 per cent ROE. So, that is not poor performance. Also, it is at a time that the sector is also growing. Is it true that the headwinds exist? Yes,” he told The Nation.
Suleiman said the cost of resolution for the crisis of 2009 is something that will be with banks for a while but that, he added, should not stop them from aspiring to deliver good returns. “These are difficult times. A time when the government and regulatory authorities are trying to stabilise prices, including exchange rates and interest rates, and the choices available to them are limited”.
And again, these are not policies that will be there forever. They will be applied in the best interest of the country, and when things stabilise, we expect some of these policies to be reversed and profitability will improve for the banks,” he said.
He said the CBN could not allow a certain level of liquidity in the system when there is pressure from the exchange rate. “And even the banks themselves are not better-off if liquidity is allowed in the system because what they gain, in terms of interest income, they may end up losing if there is significant devaluation or devaluation that is not managed properly. In my view, the CRR hike is something that must happen, and is not going to prevent any serious minded bank from returning decent ROE,” he said.
Suleiman said his bank achieved its objective, and the target that was set for last year despite the difficult operating environment. Suleiman said the increase in top line performance is impressive considering the harsh regulatory environment and the tightening stance of the CBN which have put pressure on earnings of most banks.
“Most importantly, we also reduced our cost to income ratio, and we are a more efficient bank today than we were before. We also achieved a 40 per cent growth in our risk assets, and 22 per cent growth in total assets. So, it is an encouraging performance that we are very proud of and intend to repeat in 2014,” he said.
Banks’ reactions
Banks are raising dollar-funds to fund businesses in power, oil and gas sectors. The lenders are also embracing e-payment to reduce cost of operation while also improving their commitments to Small and medium Enterprises (SMEs) sector. There is also renewed zeal to fund mortgage, agricultural and educational businesses. Banks are also reviewing their business development strategies aimed at achieving improved earnings.
In late April, the Group Managing Director, UBA Plc, Phillips Oduoza, announced a major shift in the lender’s business model and strategy to improve its earnings in Nigeria and African subsidiaries. The bank has 18 subsidiaries across Africa.
The lender had in May 1, split its operations into two broad directorates, UBA Africa and UBA Nigeria, both under UBA Plc. The bank also appointed two deputy managing directors to head the UBA Africa and UBA Nigeria directorates, and mandated each division to contribute 50 per cent to the lender’s group profit targets.
He said competition between the two directorates will be positive and improve its earnings. “We have taken a decision on how to drive Nigeria and African divisions and earn the full benefits of our investments,” he said.
Oduoza said the bank was not restructuring, but was redeploying its resources in a optimally to achieve its objectives and improving earnings.
