Nigerian Banks and Key Drivers of Performance in 2013

 

 

A combination of new policy thrusts of the financial market regulatory authorities and the emerging realities in the Nigerian economy is bound to put more pressure on money deposit banks in the new year. Analysts, however, believe the response to these challenges will vary from Tier 1 to Tier 2 banks, reports Festus Akanbi


As the banking community eagerly awaits the 2012 banks financial results, which industry sources said may start to trickle in as from March, some money market watchers have begun to weigh the implications of a number of regulatory-induced activities in the banking sector in recent times.

They argued that although the impact of some of these developments was muted in the activities of the banks last year, there are sufficient reasons to anticipate the manifestation of more pressures on banks to stay within the rule in their bid to break even in 2013.
However, it wasn’t a field day for pessimists as there seemed to be a groundswell of cautious optimism by analysts who believe in the ability of the banks to emerge profitable at the end of the 2013 financial year.

Fees and Commissions
One of the policies, which informed financial sector watchers fear may affect the bottom-line of banks in the period under review is the decision of the Bankers Committee to remove charges on ATM transactions.
According to the international financial advisory firm, Renaissance Capital, the fact that individual banks will have to bear the cost of ATM transactions (the N100 ($0.67) charge) is a signal that banks have no choice but to prepare for additional costs.

Explaining that the additional cost will be insignificant to rattle banks, Rencap in its latest report titled ‘Nigerian Banks: Still Going Strong,’ explained that as “Opposed to Bank A’s customer paying an ATM fee when she uses Bank B’s ATM, it will now fall on Bank A to pay Bank B directly for this service. In our discussions with the banks, it appears the removal of ATM fees is not material, and is unlikely to add to the cost base significantly although it was quick to add that some banks will be disadvantaged by their sizes.
“That said, we believe on the margin some banks will fare worse than other,” the report said.

It, however, added a caveat. Banks are likely to bend a bit backward to fill the hole to be created by the new policy and this may in the end put some operators on a collision course with the regulatory authorities.

For instance, Rencap said, “In our view, the banks with the largest ATM networks should be the least affected, as their customers are more likely to use their respective bank’s ATM machines. This should, generally, favour the Tier-1 banks over the Tier-2 and smaller banks. We would expect the banks to try and recoup these costs via other charges, which are either 1) unregulated, or 2) where the banks are charging below the allowable cap.”

The Tier 1 Nigerian banks, as defined by asset size and market share, are: Access Bank, First Bank of Nigeria (FBN), Guaranty Trust Bank (GTB), United Bank for Africa (UBA) and Zenith Bank.

Banks classified in the Tier 2 category in terms of assets and capitalisation are Diamond Bank Plc, Sterling Bank Plc, Fidelity Bank Plc, Skye Bank Plc, Stanbic IBTC Plc and First City Monument Bank Plc among others.

The fear of the anticipated recourse to measures, which will amount to flouting the rules is accentuated by the possibility of a removal of commissions on turnover (COT), another source of revenue for banks.

“In addition, we note the possibility that commissions on turnover (COT) fees could be removed. The regulated cap at the moment is set at 0.5% of each client’s total monthly withdrawals. Our discussions with the banks indicate that most corporates today either pay much lower COT fees, or none at all – it is largely aimed at retail customers and mid-sized corporates. While ongoing fee reductions across the board do raise a concern, we believe COT fees are unlikely to be scrapped in 2013 but could be reduced further down the line,” the report stated.

AMCON Levy
From all indications, banks will also have to contend with the reality of the recent increase in Assets Management Corporation of Nigeria (AMCON) levy, which came into effect this year.

In its explanation of the emerging scenario, Rencap stated, “For most of the banks under our coverage, we estimate that the increase in the AMCON levy from 0.3% to 0.5% implies about a c. 3-4% increase in total operating costs, holding all other factors equal,” adding that to simply stand still, banks will be required to offset this increase by an absolute decline in their other operating costs.
“In our view, few banks will be able to achieve a 100% offset, resulting in some upward pressure on cost bases.”

NPLs and Impairment Charges
Analysts also anticipate a below average impairment charges in the books of the banks by the time the 2012 results find their way to the public arena.

And to this, Rencap said, “Barring any unexpected write-offs in 4Q12, we expect most of the banks to report below-average impairment charges for FY12, on the back of the wide-ranging clean-up in FY11.
We maintain our view that these low cost-of-risk ratios are unsustainable, as most of the banks under our coverage cannot hold NPL ratios at 5% without impairment expenses of around 2%, in our opinion. Nevertheless, given the magnitude of the AMCON clean-up in 2011, we would expect the banks to continue reporting below-average charges into FY13, with normalisation likely to start coming through in FY14.”

Share-price Performance
In terms of the performance of banks’ shares, analysts believed that the Tier-2 banks have, on average, outperformed the bigger banks, with stocks up 18-38, saying, however, that the market is likely to overlook intrinsic valuations for now, given that the banks seem to have moved out of crisis stage.

Also into consideration is the reality that risk appetite globally seems to have increased, and with it flows into emerging and frontier markets. This capital needs to find a home.

Rencap maintained that as at February 2012, Nigerian banks were trading at significant discounts to peers, ranging from 50% to 65%. “We noted, at that point, that the discounts appeared justified given the depressed and negative returns reported for FY11, but they were not pricing in any recovery in 2012.

“A year later, despite the strong performance by the sector, on our numbers Nigerian banks are still trading at a discount to Emerging Market (EM) peers on both Price Earning and Price to Book multiples, albeit the discounts have narrowed. Looking at the P/B multiples for 2013, the Nigerian banks are trading at 40-50% discounts to Kenyan and South African peers and at 20-30% discounts to BRIC and the broader EMEA banks,” the report said, adding, “Relative to the returns being generated by peers in other frontier and emerging markets in 2013, we think Nigerian banks have room to re-rate further.

Conditions for Interest Rate Reduction
In his projection, Head, Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, drew a link between the anticipated reduction in inflation and interest rates in banks.

“My expectation in 2013 is that inflation will moderate towards the single digit especially in the early part of the year; hence I expect a reduction in interest rate. “This will also be helped by a stable exchange rate outlook as foreign portfolio investment continues to flow into the country. Reduction in interest rate and the high demand for the securities would lead to lower yield on fixed income instruments. Since a significant portion of banks’ profitability has been from securities trading, the disappearance of huge returns could affect the bank’s profitability; hence the banks would be forced to focus on financial intermediation.

Financial Intermediation to the Rescue
“While the banks are generally reluctant to lending, government efforts at reforming the real sector might jump-start banks’ interest in lending to the sectors. So, while I expect earnings from trading to decline, the potential profitability from financial intermediation would help the banks, especially the tier-1 banks to remain very profitable.”

Mixed Performance
The BGL official said, “In absolute terms, I believe that Tier 1 banks would do better than Tier-2 banks because of their asset size and capacity to finance large ticket transactions. However, in percentage terms, the Tier-2 banks have the potential to outperform the bigger banks. In addition, most of the Tier-1 banks have already neared the loan-deposit ratio limits, which prevents them from aggressive creation of risk assets unlike the Tier-2 banks that have more wriggle-room for financial intermediation. While, the Tier-2 banks have the potential to outperform the bigger banks, their performance over the years despite the possibilities places doubt on the expectation that they will be more profitably run in 2013.”

Power Sector Financing
According to him, “the key roles for banks in the power sector reform are in the provision of financing to the operators when needed. However, it might be too early to expect the commercial’s involvement in the sector. The long term capital requirements by power companies may just not be available at the banks. “Considering the risk environment, the hardline stance of the monetary authority on risk management, the sector may not yet be very attractive to the banks.

They might, however, be willing to provide local bank guarantee for the operators whenever needed or provide working capital facility to the firms when they become operational.”

He explained, “The banks are not very disposed to lending due to the risky business environment. In addition, the stance of the CBN on risk management also added to the banks non-disposition to lending. However, rather than discourage lending totally, I think the stringent monetary policy of the CBN will lead banks to pass all credit requests through very rigorous process, which may delay loan approvals and reduce the number and amount of loan requests granted.”

Bridged Banks are Measuring Up
The three bridged banks (now owned by AMCON) are trying to put the banks in strong footings before eventual disposal to interested buyers. According to the CBN, the banks were in very bad state before the bridging. Unfortunately, there is no public information about the current state of the banks’ financial performance.

However, given the record turnaround in its activities, Mainstreet Bank undoubtedly stands out among the three banks. The bank management has not only returned the bank to profitability but it has also put in place a cocktail of measures to reclaim its eminent position in the banking industry. Although the bank’s 2012 results are still being vetted by the authorities, sources said billions of naira profits raked in the nine-month period of last year has confirmed its readiness to favourably compete in the industry.

Also, the bank management, which is working closely with the financial advisers appointed by the CBN, is keen at improving the value of the bank in preparation for the search for new investors. All these efforts, according to sources, are targeted at improving the value of the bank before the coming of new investors.  

Confirming this, Ademola said, “Judging from the news in the media and activities from the banks, Mainstreet Bank appears to be the closest in meeting the objective. Perhaps because I know some of the directors of Mainstreet Bank, I am not surprised at what they might have achieved so far and I have faith in their capacity to turn around the bank in a short term. I am positive that the other two banks too will be successful at repositioning. However, Mainstreet seems to have moved faster than the others.”