State of banks: Struggle for market control heightens

In the past five years, the banking sector has been recording sizeable growth and profitability. But the growth is skewed in favour of the big banks, also called Tier-1 banks. The smaller banks (Tier-2 banks) are struggling for a share of the market. COLLINS NWEZE examines the performances of the lenders in terms of asset quality, lending strength and market control.

NOT a few customers are shocked by the fall of Skye Bank Plc and news of a likely takeover of Diamond Bank Plc by Access Bank Plc, notwithstanding repeated denials by both leader of the acquisition report.

However, to those monitoring developments in the sector in the past five years with keen interest, the likelihood of such acquisition is not surprising.

In times past, Diamond Bank was a leading commercial bank within the Tier-1 category, competing favorably with Zenith Bank and GTBank. But today, its (Diamond Bank’s) performance has dropped, pushing the lender to Tier-2 category. Its biggest undoing has been its level of Non-Performing Loans (NPLs) which stood at 14.7 per cent in the first half of this year as against five per cent regulatory benchmark.

Still, there are other lenders with worse NPLs. FBN Holdings NPLs stood at 22.8 per cent within same period; Union Bank (19.8 per cent); Ecobank (10.8 per cent); GTBank (7.7 per cent); United Bank for Africa NPL (6.7 per cent); Fidelity Bank (6.4 per cent) and Sterling Bank (6.2 per cent), among others.

The problems with the banking sector have been on since early 2015 when over N800 billion of capital was trapped in loans to power, oil and gas sectors following the downturn in the economy and drop in crude oil prices.

The power sector investment followed a directive by the government but today, the investment is at risk as operators struggle with cash crunch and low gas supply, making it difficult for them to meet their obligations.

Besides, the removal of commission on turnover by the Central Bank of Nigeria (CBN) is costing the banks more than N120 billion annually on revenues. The banks’ contributions to the Asset Management Corporation of Nigeria (AMCON) and Nigeria Deposit Insurance Corporation (NDIC) levies is estimated at N150 billion annually; implementation of Treasury Single Account (TSA) and high Cash Reserve Ratio (CRR), are some of the policies hurting banks profitability and liquidity positions.

More worrisome, however, is that many of the electricity generating companies (GenCos) and Distribution Companies (DisCos) earn significantly less than their projected pre-acquisition cash flows due to the government’s inability to resolve tariff and gas supply challenges.

Seeing the state of many of the banks, the CBN-led Bankers’ Committee insisted that although the banking sector is upbeat, declaring nearly N700 billion in profits in 2017, they needed to continue on aggressive debt recovery drives, realise collaterals of non-performing credits as well as get the insurance companies to settle claims relating to insured debts.

The committee believed that such steps were needed to get many of the lenders back on track. The banks are also expected to strengthen risk management practices and strictly enforce the CBN restrictions on payment of dividends by banks with high Non Performing Loans (NPLs).

How the banks stand

Fillings by many of the banks released by Afrinvest West Africa, an investment and research firm, showed that total assets of the banking sector remained strong and rose from N25.1 trillion in 2013 to N29.1 trillion in 2014. The assets also grew to N29.7 trillion in 2015; N33.9 trillion in 2016 and N37.8 trillion in 2017. The banking assets hit N38.1 trillion in the first half of this year.

Further data showed that total deposits from the sector rose from N16.2 trillion in 2013 to N18.4 trillion in 2014. By 2015, the figure rose to N19.2 trillion and to N23.5 trillion in 2016. The figure for last year stood at N25.5 trillion and N25.4 trillion in the first half of this year. The deposits are projected to hit N26.7 trillion by this year-end.

Also, the industry total loans based on company reports, rose from N8.7 trillion in 2013 to N11.8 trillion in 2014. By 2015, the loans stood at N12.2 trillion, N18.4 trillion in 2016 before dropping to N17.9 trillion in 2017. The loans stood at N16 trillion in the first half of this year and are expected to close the year at N16.4 trillion.

Further analysis showed that Tier-1 banks cornered 73 per cent of the loans in 2013; 69.9 per cent of the loans in 2014; 70 per cent in 2015 and 77.4 per cent in 2016. The figures rose to 77.8 per cent in 2017 while half-year 2018 figure stood at 80 per cent.

This implies that majority of the lending done in the sector were carried out by Tier-1 banks otherwise called the bigger banks which include GTBank, Zenith Bank, United Bank for Africa (UBA), Access Bank, FBN Holdings and Ecobank Nigeria.

The industry’s Capital Adequacy Ratio (CAR) for the Tier-1 banks showed that Access Bank CAR stood at 20.1 per cent last year and 20.8 per cent in the first half of 2018; Ecobank Nigeria (26.9 per cent/28.5 per cent); FBN Holdings (17 per cent/18.1 per cent); GTBank (25.7 per cent/ 22 per cent); United Bank for Africa (25.5 per cent/ 23 per cent) and Zenith Bank (27 per cent/21 per cent) within same periods.

The Tier-2 banks CARs which include Diamond Bank stood at 16.7 per cent/16.6 per cent in 2017 and first half of 2018; First City Monument Bank (16.9 per cent/18 per cent); Fidelity Bank (16 per cent/17 per cent); Stanbic IBTC (23.5 per cent/27.4 per cent); Sterling Bank (12 per cent/ 12.1 per cent); Union Bank (17.8 per cent/18.2 per cent) and Wema Bank (14.3 per cent/13.3 per cent) in the period under review.

The CAR is the ratio of a bank’s capital to its risk. The CAR for banks’ with offshore subsidiaries is 15 per cent minimum requirement (which rose to 16 per cent by March 1, 2015 for systemically important banks). The CAR for banks operating only in Nigeria is 10 per cent.

Gross earnings for the entire banking industry stood at N2.9 trillion in 2013; N3.3 trillion in 2014; N3.4 trillion in 2015; N3.9 trillion in 2016 and N4.6 trillion last year. Half-year 2018 gross earnings stood at N2.3 trillion and it is expected to rise to N4.7 trillion by year-end.

Speaking on the developments in the industry, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said the banking sector proceeded into 2017, on the back of successive years of growth in revenues and earnings. “With economic conditions deteriorating, the expectation was that the industry was entering a low-growth phase when strong Return on Equity (ROE) performances of the past would fade away. However, the industry remains resilient in the face of significant pressure as the economy entered a downturn,” he said.

According to Chioke, many commercial banks will restrict lending plans ahead of the 2019 general elections as they are already cutting loans to key sectors of the economy, due to the need to reduce the political risks and ensure safety of their funds.

He said the banks are afraid of taking risks with their funds due to past bad experiences.

Chioke said that banks’ ROE rose as revenue and profits accelerated, while banks’ capitalisation was stronger, with average capital adequacy ratio rising to 20 per cent in 2017 from 18.4 per cent in the previous year.

However, despite improving micro-economic fundamentals, banks’ asset quality deteriorated, further in 2017, with industry non-performing loans increasing to 9.3 per cent.

He said the financial performance of the sector was driven by the tight monetary policy of the CBN, which with its overreaching responsibility for price stability, kept rates high and system liquidity low, by conducting consistent open market operations.

“Consequently, at the start of the years, banks were able to lock in high yield investments, which crowded out private sector borrowing, while in the latter part of the year, market volatility allowed some operators to record substantial trading gains,” he said.

Pains of public sector funds

Industry watchers knew where the torrential rain pouring on the banks started.

It is common knowledge that government, whether at the centre or the states, is the biggest spender in the economy. That is why banks depend most on public sector deposits, which are often sourced cheaply from Ministries, Departments and Agencies (MDAs).

The Nigerian National Petroleum Corporation (NNPC), Nigerian Maritime Administration and Safety Agency (NIMASA) and other revenue generating bodies fall in this category. The funds which are lodged with the banks are advanced as loans to customers, whether corporate or individuals at given or negotiated interest rates.

The practice, which saw some banks holding over 75 per cent of their balance sheet in government deposits, worsened their liquidity positions when a policy change resulted in outright ban on banks holding public sector funds.

The apex bank was getting worried over the rise in liquidity from banks purchasing short-term government securities using public sector deposits. The CBN feared that strong liquidity growth could trigger a rise in inflation.

Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, said that the commercial banks’ initial reaction to the public sector deposit ban was to scramble for funds to cover their positions.

Acknowledging the government as the biggest spender, Rewane, spoke of the need to focus on retail business because of the immense opportunities therein. He said banks needed to expand their retail banking bases, and improve customer services.

“The truth about the public sector deposit ban is that there is nothing to do other than to mobilise deposits.

The Independent Shareholders Association of Nigeria (ISAN) President, Boniface Okezie, is not happy with the state of the local banks. His grouse is not with the banks, but with the government and financial system regulators. He said both have depleted lender’s revenue sources through diverse policies.

Okezie, who has investments in almost all the commercial banks, told The Nation that with unfavourable regulatory and government policies in place, the banks should prepare for hard times.

Already, the lull in economic activities has triggered a drop in customers’ deposits in banks.

Speaking to the nation on the state of the banks, Head, Research Coronation Merchant Bank Limited, Guy Czatoryski, said the challenge with the banks is that loan demand has dropped significantly in recent years. He said weak loan demand is the biggest challenge facing banks and will continue nest year due to poor economic growth.

The regular bank customers that were borrowing excessively before hardly come back for loans given the poor state of the economy.

Czatoryski said that weak borrowing now witnessed among bank customers has nothing to do with cost of the loans.

“If you tell me that loans are expensive today, they have been expensive in the last 10 years but that did not stop people from taking loans. It is not a question of pricing for the loans but weak demands for products. The industry is weak. It is very important not to confuse that,” he said.

He said the weak demand for loans is affecting the banks’ profitability and ability to grow.

Czatoryski said: “How big is the banking sector and how big is the economy? You are talking as if lending is about 100 per cent to Gross Domestic Product (GDP). Lending is only about 10 per cent to the GDP. So, the link between the banking sector and the economy is not strong because most people do not have loans,” he said.

“The outstanding loan of banks is not more than 10 to 15 per cent of the GDP and that is very poor. You are talking of a very small banking sector servicing a large economy. That is the problem, and it will take years for the banking sector to match growth in the economy.

“In the United Kingdom (UK) and America, the economic managers can easily control interest rate because almost everybody has a loan. That is what is lacking in Nigeria because Nigerians are not taking loans.”

He advised that the banks should be allowed to make more profits to enable them grow and service larger part of the economy.

Former Executive Director, Keystone Bank, Richard Obire, said banks can only have more money to grow their businesses in a growing economy.

According to him, every business has the ambition to grow year-on-year, but that would be difficult to achieve under a shrinking economy.

To him, all forward-looking banks should look at what would protect their revenues, by identifying and focusing on the healthy side of the economy.

Obire said: “For me, the brewery sector has done exceptionally well in the face of the ongoing downturn in the economy. The agricultural, and Information Communication & Technology (ICT) are fast growing sectors that banks can tap into. The fast moving consumer goods’ sector is also a critical sector that lender can key into because despite the state of the economy, people must eat.

“The non-oil sector is also areas to watch, because of their capacity to generate foreign exchange for the economy. The downstream oil sector has huge prospect given the increased cash-flow that came with the over 67 per cent hike in petrol prices. The upstream sector should be avoided for now.”

Obire regretted that the banking sector lacks the strategy to create new investment opportunities, but are always looking out for short-term opportunities to explore and make immediate profits.

He said that although the power sector is facing a huge challenge, it also presents huge business opportunities for lenders to explore.

Obire said: “It is only the power from traditional sources that are facing problems. What about developing and funding the non-traditional sources like solar energy. Banks can go to countries where the solar option has worked and see how it was financed for the purpose of adopting same strategy here. That would present a new opportunity for such bank to earn sustainable revenues.

“The power sector is crying for new investments. Millions of Nigerians and industries are zealous to pay for power. Capital will flow to opportunities that are well established but it is unfortunate that our banks are lazy and not creative.”

The CBN Deputy Governor Edward Lamtek Adamu, said the finance sector needs regulatory buffers to strengthen banks’ capacity to withstand shocks. For him, the regulator also needed to   build   buffers   on   both   fiscal and monetary sides in preparation for a possible downturn.

He said: “Interestingly, banking  system stability  is  required  for  proper  financial  intermediation  (including  credit  flow  to the  real  sector)  which  is  needed  to  support  recovery  in  output. The feedback causation  between  the  banking  system  and  the  realeconomy  has  to  be carefully managed always and especially so during this (recovery) phase of the economy’s business cycle.”

Overall, stakeholders believe that both the regulators and government needed to support the banks in terms of favorable policies for them to effectively service the over $500 billion economy, which is the biggest in Africa.