By Nkiruka Nnorom
In the face of a persisting difficulties in the macroeconomic environment as well as uncertainties in the political environment, current figures indicate that banks are downsizing their loans and advances to businesses in favour of investments in treasury instruments.
By last weekend when the last batch of the financial results of leading banks were announced, total credit to businesses had shed N855 billion in the first half of 2018, H1’18, or 5.7 percent from the N14.9 trillion they dolled out in the corresponding period of 2017.
The percentage decline was worse at about 8.6 percent before Access Bank Plc released their results on Wednesday last week.
Conversely the banks’ investments in treasury instruments such as bonds and treasury bills, were in the up-beat by 2.6 percent to N6.87 trillion until United Bank for Africa Plc, UBA, announced its figures on Thursday, which flattened the tally.
The allocation of funds in favour of treasury instruments appears a defensive strategy against loan failures. Thus, the banks are sacrificing profit for safety since returns on direct credit to businesses are higher, while yields on treasury instruments have tumbled in the past 12 months.
According to financial experts, banks’ preference for investment in financial assets stemmed from the harsh operating environment, which has made credit advancement to the real sector even more riskier.
A breakdown of the individual bank’s funds allocation showed that with the exception of Access Bank, which raised its loan portfolio by 9.5 percent, the remaining four tier-1 banks (Zenith Bank, Guaranty Trust Bank, First Bank and UBA) demonstrated reluctance to lend, cutting down on their loan exposure by 14.4 percent, 13.4 percent, 7.1 percent and 1.03 percent respectively.
Financial Vanguard’s inquest showed that of the 12 banks outside the tier-1 group reviewed, only four (Stanbic IBTC Holdings Plc, Sterling Bank Plc, Wema Bank and Access Bank) upped their loan portfolio while the rest effected significant reductions in their level of lending to businesses.
Conversely, seven of the banks, including Access Bank, Zenith Bank, Stanbic IBTC, Sterling Bank, Union Bank, FCMB and GTB increased their investments in financial assets, but others effected some reductions.
This Financial Vanguard’s findings is much in line with the recent banking sector report by the National Bureau of Statistics, NBS, which indicated that banks are still reluctant to lend to the private sector.
Investment experts that spoke to Financial Vanguardmaintained that some structural challenges that have, hitherto, hindered banks’ credit flow to the private sector need to be addressed in order to encourage banks to lend in the high risk space.
“We believe there is a growing level of risk aversion by the Nigerian banks towards lending to the private sector given long-term structural challenges in the Nigerian business environment. Thus, unless these structural challenges are fixed, even the planned Central Bank of Nigeria (CBN)’s dynamic Cash Reserve Ratio (CRR) might not be able to spur or incentivize banks to give credit to private sector,” said analysts at United Capital Plc, a Lagos based investment house.
Breakdown of the loan exposure of the banks showed that Diamond Bank, for instance, recorded the biggest reduction in its loan exposure to the private sector with 26.6 percent decline to N727.694 billion from N984.3 billion. Zenith Bank followed with 14.4 percent reduction to N1.873 trillion from N2.167 trillion; GTBank reduced its loan exposure by 13.4 percent to N1.291 trillion from N1.490 trillion, while Ecobank effected a 7.5 percent cut in loan portfolio to N2.682 trillion from N2.899 trillion.
First Bank, FCMB, Union Bank and UBA reduced their loan exposure to businesses by 7.1 percent, 5.0 percent 1.6 percent and 1.03 percent to N1.858 trillion, N48.284 billion, N470.122 billion and N1.544 trillion respectively.
Mr. David Adonri, Managing Director/CEO, Highcap Securities, in a chat with Financial Vanguard explained that the introduction of Treasury Single Account, TSA, which has reduced the funds available to the banks for on-lending and difficulty in the economy have combined to frustrate fund flows from banks to businesses.
He stated: “Two things are involved; because of this Treasury Single Account, TSA, the amount of money available to the banks to lend has diminished considerably. Secondly, the economy, generally, is not performing well and so, the risk of giving out loans has increased considerably. So, the banks are very conservative now in that respect. If you take those factors into consideration, that is why the quantum of loans they are granting has reduced.
“The securities they are investing in are risk-free and if they were to advance the loans to enterprises, (the economy is failing and many enterprises are failing), they (the banks) run the risk of losing those funds and that is why the funds are being channelled to debt securities that are risk-free.”
In his own view, Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, said: “We are approaching an election period; we are in the period of heightened political risk. At such periods, financial institutions are not aggressive in lending. What they do is that they invest in very liquid instruments while waiting for political and policy clarity to decide where to put their funds. So, it is the same as what is happening in the stock market.
“Government defines economic direction because government policy determines where investors will put their money. The government policy can make or mar any sector of the economy and banks are conscious of that.”
He argued that the decline in banks’ loans and advances does not have anything to do with yield in fixed income assets, saying that the yield environment has actually moderated compared to what it was last year.
“Last year, we were dealing with yield on treasury bills of close to 20 percent and coupons of 18.7 percent. Today, we are talking about maximum of 11, 12 percent yield. So, it is not a yield issue,” he said.
According to David Adonri, the economy needs a new breather that would rejuvenate it and encourage banks to lend more. “It is better for us to wait for the election next year and see if the government that will take over power will come out with a better policy that will drive the productive sector and resuscitate the economy, but I don’t think the government in power has the personnel capacity to do that,”he said.
Jonhson Chukwu advised the government to ensure that the sanctity of the electoral process is maintained and as much as possible try to reduce the tension in the polity so that people will be assured that the election will be successful and the outcome will not be disputed.
Also speaking, Mr. Solomon Aderoju, chairman, Lagos branch of National Association of Small and Medium Enterprises, NASME, said there is need to increase the financing windows and make them more seamless.
He stated: “Banks are not supporting us the way they should and if at all they want to help, the interest rate is high, the conditionality are not friendly at all. So, we the Micro Small and Medium Enterprises, MSMEs, want more robust window and seamless windows to help our members.
“Bureaucracy does not allow Small and Medium Enterprises, SMEs, to access the funds. The conditions are tough to be met; the criteria attached to it is not SME friendly.
He, therefore, advocated for SME development bank that will be in charge of loan disbursement to small businesses”.