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Bankers learn to lend as end of free money slows profit growth

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Nigerian bankers are once again discovering their core mandate of lending as the end of free money in the form of public sector deposits and growing regulation mean the industry’s earnings rose last year at the slowest pace since 2010.

Banks lent a larger portion of their deposits in 2013 compared to 2012, as the cumulative pretax profit of 12 commercial bank’s which have released Full Year 2013 earnings, increased a mere 8.12 percent, to N434.64 billion, compared with the industry’s 488.7 percent earnings growth in 2012.

The average loan-to-deposit ratio for the 12 banks rose to 58.55 percent in the fourth quarter of 2013 from 55.02 percent a year earlier, as lenders sought to replace profits lost to higher cash reserve requirements (CRR), tighter monetary policy and regulation aimed at lowering fees and increasing competition.

“Higher cash reserve requirements imposed by the Central Bank crimped profit last year by N3 billion,” said Diamond Bank’s chief financial officer, Abdulrahman Yinusa in a recent interview. “Higher volume of customer deposits will help us reduce the effect.”

Loan-to-deposit ratios measure how inclined bankers are about lending, with higher numbers signaling a more aggressive stance.

The ratio grew even as the lenders total deposits rose 17.4 percent to N12.5 trillion, from N10.64 trillion in 2012.

The Central Bank of Nigeria (CBN) has set a prudential requirement of a maximum loan to deposit ratio of 80 percent for Nigerian banks.

The modest earnings growth of Nigerian banks is commendable when put in the perspective of the market and regulatory pressures, according to Abiola Rasaq of the Research and Strategy Unit of Associated Discount House Limited.

 “You will reckon that beyond the increase in funding cost (which partly resulted from increased cash reserve requirement), higher contribution to the resolution cost fund (AMCON levy) and reduced COT charges, all pressured the earnings generation of Nigerian banks in 2013,” Rasaq said in an email response to BusinessDay’s questions.

 The CBN has increased CRR -the minimum cash, as a percentage of customer deposits that each bank must set aside as a reserve, from 4 percent in 2011 to 15 percent for private deposits and 75 percent for public sector deposits. 

The regulator also told lenders to lower fees and commissions to reduce costs to customers.

Banks are beginning to loosen lending practices after a rise in margin loans fueled a credit bubble in 2009 leading to non performing loans (NPLs) rising to as high as a third of total banking industry loans.

Nigerian lenders signed about $13.5 billion of syndicated loan deals in 2013, rivaling South Africa. They are also raising capital to boost capacity to lend, as they seek to grow risk assets to take advantage of continuing opportunities in Africa’s largest economy.

Zenith Bank, Nigeria’s second biggest lender by market value, recently sold $500m in 5-y senior unsecured Eurobonds.

The push by lenders to create risk assets and expand their loan books is a tight rope to walk though, as they would have to ramp up lending while keeping bad loans from ballooning.

“The banking industry may see credit issues emerge fairly quickly, when loans mature in about two years, as a result of the short credit cycle and volatility in asset quality,” said Samira Mensah, associate director, Financial Institutions ratings at Standard & Poor’s (S & P) in a recent interview with BusinessDay.

“As banks start lending again to risky levels, some banks may lend beyond their ability,” she said.

The cumulative loan loss expenses for six lenders (GTB, Zenith, Access Bank, FCMB, Sterling Bank and Skye) as reported in their audited 2013 results fell by 19.4 percent to N36.61 billion from N45.42 billion at the end of 2012.

Increased lending as reflected in strong loan growth across board is an attractive fundamental that should sustainably buoy Nigerian banks’ earnings growth, going forward, while S & P’s fears on lenders loan quality may not materialise, according to Rasaq.

“Nigerian banks are increasing duration on loan books with exposure to relatively longer term assets, thus providing a stable base for interest income accretion,” said Rasaq.

Article Credit: Businessdayonline

Updated 5 Years ago

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