By Omoh Gabriel, Business Editor

Four Nigerian banks may lose N88 billion in revenue to the proposed phase out of Commission on Turnover, COT, charges. This may give rise to a minimum rate on savings accounts that could raise interest expense by the banks to N22 billion in 2013, a recent report by HSBC on four out of the twenty-four Nigerian banks has revealed.

The report, which has been circulated among foreign portfolio investors, said that banks operating in the country will struggle to fully offset negative pressure on revenues as cost of risk starts to increase as loan growth recovers due to tighter regulation of fees and cost of savings account since the beginning of the year. The report focused its search light on First Bank, GtBank, UBA and Zenith Bank.

The HSBC report said that Nigerian banks will be under stronger pressure to improve operating costs in order to preserve returns. The report singled out Zenith Bank as the bank that is most sensitive to rising cost of savings account and can hold its cost better than its competitors, as well as having better cost control and asset quality.

The report said that better cost control is the only way for Nigerian banks to mitigate reduction in the sector profitability, but high fixed cost base would limit efficiency gains.

As an advisor to several institutional investors the HSBC report said, “High fee/loan ratios and cheap, inflation adjusted, funding costs are key profitability drivers of Nigerian banks. A new set of regulations on banking charges effective from 1st April 2013 has transformed the profitability structure of the Nigerian banks we cover. A gradual phase-out of commission on turnover (COT) fees and the introduction of a minimum rate on savings deposit accounts, in our view, should have the strongest negative impact on earrings.

Continuing the report said “Tighter regulations should encourage banks to focus more on cost optimisation and loan growth. We think that not all banks can mitigate increasing earnings pressure. We calibrate the cost of new regulations for each bank we cover and how they can mitigate such pressure. Phase-out of COT fees will result in revenue loss of N88 billion, 10 per cent of 2012 combined revenue. The gradual elimination of COT fees to 0 by 2016 from N5per N1000 in 2012 should result in N88 billion in revenue losses for the four banks under our coverage. This is equivalent to 10 per cent of combined revenue banks earned in 2012.”

According to HSBC, in 2010, First Bank earned N34 billion from COT. This rose to N39 billion in 2011, N48 billion in 2012 and is estimated to drop to N33 billion in 2013 and further to N24 billion in 2014 and N14 billion in 2015. Gtbank the report said earned N36 billion as revenue from fees in 2010, N35 billion in 2011, N37billion in 2012, N25billion in 2013, N18 billion in 2013 and N10billion is the expected revenue from COT in 2014.

According to the report, UBA in 2010 generated N27 billion from COT, N31 billion in 2011, N35 billion in 2012, N23 billion in 2013 and N18 billion in 2014.

Zenith Bank Plc, the report said, generated N46 billion from COT in 2010, N57 billion in 2011, N55 billion in 2012 and N43 billion is expected in 2013.
HSBC said that COT fees make up the bulk of fee income of Nigerian banks, especially at FBN.

Commission on turnover applies to customer ­induced debit transactions on current accounts. In its July 2012 draft on bank charges, the Central Bank of Nigeria noted that most banks in the country charged N5 per N1000 transaction.
According to HSBC Nigerian banks main profitability pillars are fees and funding. It said “Nigerian and South African banks have highest fee loan ratios among markets covered at HSBC. We estimate that over time Nigerian banks’ fee loans ratio will normalise between that of Egyptian and South African banks GCC banks on the other hand have lowest downside risks to fee income they earn.

Nigerian banks earned 2.2 per cent of their loans in commission on turnover (COT) fees in 2012, this was an increase from 1.9 per cent in 2010 We factor in COT fee structure as per CBN guidelines effective 1″ April 2013, i.e. a gradual phase-out of fee income . We fully eliminate COT fee income by 2016. The resulting fee loan ratio drops to 2.5 per cent in 2016 from 5 per cent in 2012. We adjusted asset yields and funding costs for inflation in each country to reveal how banks earn their net income margin. Clearly, most banks generate earnings by paying below inflation for their funding. Nigerian, Saudi, Egyptian and Lebanese banks stand out. Asset yields do not cover the rate of inflation in Nigeria, Saudi and Lebanon. Nigerian banks report highest net income margin mainly due to very cheap funding cost.

“To arrive at our estimate of turnover volume we divided 2012 COT fee income by N5. We assumed that turnover volume will grow by 15-20 per cent per annum in the forecast period. Our COT fee income forecast is a product of turnover volumes and the COT fee ofN3 in 2013, N2 in 2014, and NI in 2015 (per CBN guidelines).

The report further said “The large volume of savings accounts, which varies between 8 per cent and 23 per cent of total deposits means that banks will have to increase interest expenses as CBN now requires them to pay a minimum of 30 per cent of monetary policy rate (MPR). With MPR at 12 per cent now, this is equivalent to 3.6 per cent. Before the introduction of the minimum rate on savings accounts, we estimate that FBN paid I per cent on savings accounts. GTbank does not break down its interest expense on savings accounts”.

The HSBC report also said “We estimate that the interest rate here was 2.5 per cent in 2012. In the case of Zenith, we estimate cost of savings accounts was I per cent. Zenith and FBN paid the lowest rate on savings accounts in our coverage. FBN, however, has the highest ratio of savings accounts in its customer deposits, 23 per cent. This makes it most sensitive to any increase in cost of savings accounts. UBA stopped disclosing a breakdown of its deposit expenses in 2012. We think that UBA paid 1.3 per cent on savings accounts in 2012, in line with 2011”.

Combined interest expenses on savings accounts should increase by N2l.7billion in 2013, with the strongest increases at FBN and UBA, as per our estimate. Funding costs will increase in 2013. FBN’s funding cost advantage relative to peers should be less than before.

“In our sector initiation report Save now to invest , 14thSeptember 2012, we argued that Nigerian banks have plenty of room to improve costs. An expected attrition in fees and upward pressure on funding costs should force banks to control costs better. There is in fact little room for banks to maneuver on costs as 40-50 per cent of the cost base is fixed. Our re-examination of the cost structure of the banks we covered suggests that UBA and Zenith were the two banks which made the strongest progress in controlling costs. This can be seen in headcount per branch numbers in the case of Zenith and in the cost to income ratios of both banks. Zenith and UBA were the only two banks to cut staff expenses in 2012. For comparison, staff costs at First Bank and GTbank increased on the average by 23 per cent year on year in 2012.

The report said “We forecast further cost efficiency gains at UBA and Zenith, l per cent of total assets between 2012 and 2015. GT Bank already has a good cost structure, with not much room for potential improvement, in our view. We forecast efficiency improvement at FBN, UBA and Zenith. GT Bank already has lowest cost income ratio. FBN still demonstrates the highest cost per employee. “However we think this metric will be difficult to reduce to the industry average. We believe higher staff cost per employee could be owing to the high headcount allocation at a headquarter level, where staff cost, tend to be higher”.

The report said that AMCON levy puts floor to cost cutting in Nigerian banks. It stated “We assume 0.5 per cent in AMCON levy for next 5 years. Our 2013 forecasts reflect an increased AMCON levy which is now 0.5 per cent of total assets, up from 0.3 per cent a year ago. The negative equity position of AMCON, $19billion as at December 2012, suggests that the levy is unlikely to decrease going forward, unless the Government recapitalises it, which we think is unlikely”.

HSBC Research estimates a 7 per cent capital shortfall in AMCON. It said “For now we assume that the Government fully transfers the high cost of the AMCON recapitalisation to the banking sector. At a 0.5 per cent, AM CON levy and a 15 per cent per annum increase in banking assets, we calculate it would take 23 years for AMCON to be recapitalised in full. Our calculation assumes a 0.5 per cent AMCON levy.

“If one assumes that AMCON needs to recapitalise to $I billion, which puts its equity-to-asset ratio at a modest 7 per cent, AMCON would require $20billion in new capital. This is equivalent to roughly half of Nigeria’s foreign currency reserves. In the absence of recapitalisation of AMCON by the Government, the banking sector has little room for large systemic defaults”.


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