Banks’ Appetite to Grow Loan on Decline as Average Asset Yield, NIM Fall
Nigerian banks’ appetite to grow loans is on decline as average asset yield, net interest margin (NIM) continue to free falling, according to analysts.
Due to low interest rate environment ushered in by the monetary authority dovish stance, earnings from interest yield asset classes have plunged.
Amidst tight regulation on portion of customers deposits expected to disburse as loans, banks have been projected to maintain low risk credit profile in 2021.
The Nigerian economy, after two consecutive negative growth slipped into recession.
The macroeconomic condition was however worsen due to the outbreak of coronavirus with resultant market impacts.
Despite the tough environment, the Nigerian Central Bank continue to debits lenders for failing to meet its 65% loans to deposits ratio target.
In a bid to stimulate the local economy, the CBN has directed banks to extended at least 65% of their customers’ deposits as loans to the productive segment of the economy.
Unfortunately for lenders, risk of credit default has heightened due to weak macroeconomic condition and the outbreak of COVID-19 worsen the situation.
Though, projection shows economic rebound is on the horizon, but tough competitive operating environment and vaccine distribution remains a downside to performance.
Analysts said it appears lenders would maintain low risk profile following low interest rate environment.
CardinalStone Partners in a report said interest rate has remained low despite initial questions about the sustainability of holding such a stance by the Central Bank.
Doubtlessly, the firm stated that whatever hopes there were of a possible directional change in rates during the year were puffed out following the advent of the coronavirus pandemic.
In a note, Bukola Jeje, analysts at Tellimer, an emerging market investment firm stated that low yield environment and regulatory-induced reduction in fee charges will affect major revenue drivers in the banking sector.
“We expect loan growth to be slower, with the CBN’s special bills doing little to boost risk asset creation”, Tellimer’s analyst explained.
Explaining top factors to shape Nigerian banks performance in the fourth quarter of financial year 2020, Tellimer listed low yield environment as key factor, and ability of lenders to sustain rapid growth in digital transactions volume.
Also noted were movement in operating expenses across the industry and appetite for loan growth which seems already dampened.
On low yield environment, Tellimer analyst stated that a direct outcome of the Central Bank of Nigeria (CBN)’s expansionary policy actions has been the downward pressure in net interest margins.
Jeje explained that this will be reflected in fourth quarter of financial year 2020 earnings numbers.
It was however noted that funding costs for banks with a high proportion of savings deposits in their mix should drop more than for peers, due to the reduction in savings deposits rate in September 2020.
“In line with market development, the Bank has reviewed the minimum interest payable on savings deposits as provided in Guide to Charges by Banks, Other Financial and Non-financial Institutions issued in 2019.
“Consequently, all deposit money banks are hereby informed that effective from September 1, interest on local currency savings deposits shall be negotiable subject to a minimum of 10% per annum on Monetary Policy Rate”, the CBN circular reads.
Tellimer’s analyst also noted the ability to sustain rapid growth in digital transaction volumes
Jeje said growth in transaction volumes in Q2 and Q3 of 2020 benefited heavily from the COVID-19 lockdown.
This was because banks customers were forced to explore digital banking means rather than rely on the traditional ‘bricks and mortar’ presence of banks.
“For Q4-2020, we expect the initial surge to lose some steam, as activities gradually returned closer to normal -post-lockdown.
“Bearing the above in mind, and in addition to the regulatory-induced reduction in charges, fee income is expected to be weaker in Q4-2020”, Tellimer’s analyst said.
Further to that, Jeje noted that the pandemic presented an opportunity for the banks to reduce down some operating costs.
This was related particularly to business travel, office expenses that slowed down in Q2 and Q3-2020, translating into an improvement in cost-to-income ratios.
Given the gradual return to pre-pandemic activity, the declining trend in costs is likely to slow in Q4-2020, Jeje explained.
Meanwhile, Tellimer believed that the CBN’s decision to suspend layoffs of banking staff in May 2020 will keep a floor on how far personnel expenses can be reduced.
Detailing development in the loan segment, Tellimer expects loan growth in Q4-2020 to be lower than in recent previous quarters.
“As at Q3 20, most of the banks under our coverage had met or were close to their 2020 guidance for loan growth.
“While the CBN has sold N4.1 trillion worth of special bills at 0.5%, we believe the banks may initially be reluctant to aggressively dispose of these securities and create loans, given the current economic woes.
“These reasons, as well as the need to limit any deterioration in asset quality, will dampen loan growth”, Tellimer stated.
CardinalStone explained that the realities of low rates cascaded to about 1.1% moderation in interest income for CardinalStone’s coverage banks.
This comes despite a 10.6% growth in loans as at 9-month of financial year 2020 while 2021 unravels, analysts said that the interest rate sustainability question persists.
“Our base expectation is rates would reverse direction both as the economy recovers from recession and the monetary authorities attempt to rein in rising inflation”, CardinalStone noted.
Although, analysts explained that they have conservatively assumed an average 20 basis points cut in asset yields for the firm’s coverage.
CardinalStone said Nigerian Banks also share the notion that a change in direction lurks somewhere soon, and some are playing short tenors for asset creation in anticipation.
“However, say rates remain persistently low through most, or all, of the year, then we envisage that banks will have to rely on increased lending volumes to support interest income.
“Positively, low rates could bode well for interest costs, but there is only so much that can fall further from current levels.
“We envisage that material interest cost savings could come in the first half of 2021, and be flattish by second half or inch higher”, CardinalStone explained.
Analysts reckoned that regulatory uncertainty, socio-political concerns, unfavourable operating environment, weak macros, and digital disruptions are few of the many scares facing the Nigerian banking sector as 2021 unravels.
“Despite the earlier than anticipated resumption of major economic activities, which, we believe, offered some respite for earnings, we fear that the road to recovery and sustainable growth may still be arduous”, CardinalStone noted.
The firm added that Nigerian Banks ROEs appear to be reverting to their mean, and unless banks look for ways to achieve earnings flexibility and resilience, market could well see ROEs dip below their historical mean level.
It was however noted that a few banks have started to restructure their operations in light of this new reality.
However, the impact may not be immediate. The move is, however, a good start towards seeking a bit more dynamism in performance, CardinalStone Partners explained.
Read Also: Nigerian Banks’ Stage 3 Loans Ratio Projected to Print at 11%
Banks’ Appetite to Grow Loan on Decline as Average Asset Yield, NIM Fall
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