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How low yield, high NPL took toll on tier-1 banks’ performance

By Nkiruka Nnorom

THE high Non-Performing Loans (NPLs) in the banking industry as well as decline in the yield environment in the Federal Government of Nigeria, FGN, debt instruments have taken a toll on financial performance of tier-1 banks operating in the country.

Financial results of the tier-1 banks for the period ended December 31, 2018, showed that earnings for the period was down, undermined by significant decline in Zenith Bank and FBN Holdings Plc’s (First Bank) earnings, though pre-tax profit witnessed relative increase at 13.97 percent.

Banking hall

The banks, which include Access Bank Plc, Zenith Bank Plc, United Bank for Africa (UBA) Plc Guaranty Trust Bank Plc and FBN Holdings Plc, posted a combined gross earnings of N2.67 trillion, a 0.4 percent decrease over N2.68 trillion recorded in the corresponding year in 2017 despite huge increase in the financial resources they deployed to the government instruments and other securities.

During the year, the banks upped their investment in financial securities by N757 billion to N6.1trillion from N5.3 trillion in 2017, representing 14.2 percent increase.

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For instance, Zenith Bank Plc, which recorded the highest revenue decline of over 15 percent had raised its investment in FGN bonds, Treasury Bills, TBs, and other instruments by 24.8 percent to N1.7 trillion from N1.3 trillion in 2017.

Similarly, FBN Holdings Plc, which also recorded two percent decline in gross earnings increased its investment in financial instruments by 32.6 percent to N1.8 trillion from N1.3 trillion.

Access Bank with the highest revenue growth of over 15 percent, increased its investment in financial securities by 22.8 percent to N721.3 billion from N587.4 billion. UBA Plc, which posted seven percent increase in its gross earnings, upped its investment in financial securities by 30.5 percent to N1.7 trillion from N1.3 trillion, while GTBank with marginal increase of 3.7 percent in gross earnings, also grew investment  in financial securities marginally by 1.8 percent to N652.5 billion.

However, their pre-tax profit rose to N722.53 billion from N633.92 billion in the corresponding period in 2017, representing 13.97 percent increase.

Investment bankers, who spoke to Financial Vanguard said that besides the impact of high non-performing loans and declining yield environment in FGN debt instruments, tottering economic environment also contributed to the weakness in the banks’ earnings.

Available data showed that the NPLs of banks operating in the country stood at 13.22 percent as at fourth quarter of 2018 (Q4’18), while average NPL in 2018 was 15.02 percent.

According to Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, a Lagos-based investment banking firm, decline in yield curve led to loss of major income sources for the banks during the year.

He, however, said that the tier-1 banks showed resilience considering the challenges in the business environment.

Zenith Bank in mixed results

Financial Vanguard’s  analysis showed that Zenith Bank Plc topped the earning spot in absolute figures though it recorded a huge 15.4 percent decline in its earning.

Specifically, the bank’s gross earnings stood at N630.34 billion, 15.4 percent decline against N745.19 billion in 2017.

FBN Holdings Plc, which also recorded decline in its earnings, ranked second in absolute figures, posting N585.95 billion as revenue against N597.76 billion in 2017.

Access Bank placed third in absolute figures, but topped others in percentage growth. The bank recorded N528.7 billion gross earnings, 15.2 percent increase compared to N459.08 billion recorded in the previous year.

UBA Plc was the next with N494 billion gross earnings, which represents seven percent increase over N461.6 billion recorded in 2017, while GTBank posted N434.7 billion gross earnings, representing 3.7 percent increase against N419.2 billion in the corresponding year.

Access leads profit growth rate

Access Bank Plc with 32 percent increase in pre-tax profit topped other tie-1 banks. It grew its profit before tax to N103.2 billion from N78.2 billion in 2017. FBN Holdings placed second with 19.7 percent growth to N65.29 billion from N54.52 billion; Zenith Bank Plc took the third position, recording 16.2 percent increase in its pre-tax profit to N231.7 billion from N199.3 billion. GTBank ranked fourth with 9.1 percent increase to N215.6 billion from N197.7 billion, while UBA achieved 2.4 percent pre-tax growth to N106.8 billion from N104.2 billion in 2017.

Analysts comment

Commenting on the banks’ performance, Chukwu said: “Given the environment the banks operated in 2018, though their earnings was almost flat, I believe that tier-1 banks showed resilience because if you compare the economic environment, especially the yield curve in the environment, you will observe that yield on federal government debt instruments declined materially in 2018, which led to loss of major income source for the banks.

So, for the banks to have been able to achieve about the same level of earnings, was a mark of resilience on their part. The other factor that worked against them was the increase in non-performing loan; we saw increase in non-performing loan at about 15 percent in 2018.”

Continuing, he said: “The reality is that growth in the economy has remained very weak and that is why instead of improvement, we are seeing deterioration in asset quality. Of course, if you look at the Gross Domestic Product (GDP) growth in 2018, it was only 1.92 percent, which is almost in tandem with what you saw in the performance of the banks.

The reality is that the economy remained sluggish. Therefore, there was no improvement in opportunities available to the banking sector in the economy, rather the banks experienced loss in yield and increase in non-performing loans.”

Bank MDs explain result

Chief executive officers of the banks attributed the outcome of the year’s business to stringent and tough operating environment.

Mr. Kennedy Uzoka, Group Managing Director/CEO, UBA, pointed to weak economic growth, but stated that the bank focused on retail deposit mobilisation to stay above board.

“Defying the relatively weak economic growth in Africa, earnings were positive and we grew our balance sheet by 20 percent, driven by the 23 percent growth in our deposit funding. In a period of economic uncertainty, we have focused on retail deposit mobilisation, with exciting results,” Uzoka said.

Mr.  Segun Agbaje, MD/CEO, GTBank, speaking on the financial results, said: “In 2018, our focus on staying nimble, strengthening customer relationships and driving our digital-first strategy paid off.”

He said that the bank successfully navigated the pressures of its challenging and radically changing business environment, recorded growth across key financial indices and reaffirmed its position as one of the best performing and well managed financial institutions in Africa.

Herbert Wigwe, GMD/CEO, Access Bank, said: “2018 marked a significant year of progress for the bank amid an unfavourable macro climate. We made solid progress throughout 2018 in line with our 2018-2022 five-year strategy and we remain committed to the achievement of our strategic imperatives going forward as we continue to invest in our people and technology in order to improve operational efficiency.”

Peter Amangbo, MD/CEO, Zenith Bank, said: “Due to a challenging macro-environment, gross earnings and interest income reduced by 15 percent and seven percent respectively, driven by declining trading income, compressed yields on assets, and a reduction in the loan book by 10 percent.

“Despite the decline in gross earnings, the Group mitigated these knock-on effects through growth of its net interest income and operating income by 15 percent and eight percent respectively as it was able to ensure improved cost efficiencies across the business.”

2019 outlook

Analysts at United Capital Plc in their outlook for the banking industry in 2019 said that the elevated yield environment and potential post-election uncertainty, suggests that banks may sustain the recent deployment of funds to financial assets amid policy normalization in the US and increased liquidity mop-up exercise by the Central Bank of Nigeria (CBN). “The yield environment is, however, expected to retrace in H2-19 in the event of a successful and smooth transition. This may hurt bottom lines,” they said.

Chukwu of Cowry Asset Management said that 2019 would remain largely the same for the tier-1 banks. We may see a marginal improvement in GDP growth rate, which will not be sufficient to lead to reversal in the high level of non-performing loans.

“So, the banks will have to continue to contend with balance sheet that is weakened by high level of NPL. The other factor is that we have seen the yield environment trending southwards.

“So, they may come under further suppression in yield in the coming months. However, I think the banks will leverage some of the on-lending facilities that the CBN is providing, including the discretionary cash reserve policy that the CBN recently introduced, which allows them to claw back amounts in reserve for loans granted to some specific sectors of the economy.”

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