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Merchant Banks under pressure to grow earnings

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Interest income falls by 18%

By Babajide Komolafe

THE merchant banking subsector suffered 18 percent decline in interest income in 2018, which constrained growth in revenue, prompting operators to switch to non-interest income to offset impact of lower fixed income yield on their financial performance.

The subsector comprises five merchant banks namely Coronation Merchant Bank, FBNQuest Merchant Bank, FSDH Merchant Bank, Rand Merchant Bank and NOVA Merchant Bank, which commenced operations May 2017.

Banking hall
Banking hall

Financial Vanguard analysis of the group operating results of the five merchant banks revealed that net interest income dropped to N23.7 billion in 2018 from N29.1 billion in 2017, indicating 18.4 percent decline.

Operators blamed this development on fluctuations in  fixed income yields in 2018, as well as cautious approach to lending due to weak economic growth.

Financial Vanguard’s findings show that in the first half of 2018, yields on fixed income instruments declined, but commenced an upward trend in the second half.

Yields on 91 Days (primary market auction, PMA) treasury bills (TBs) dropped by 295 basis points (bpts) steadily to 10 percent by end June 2018 from 12.95 percent in December 2017. It, however, rose by 90 bpts to 10.9 percent by the end of 2018.

Similarly, yields on 182 Days PMA TBs dropped 470 bpts to 10.3 percent in June 2018 from 15 percent in December 2017. It, however, rose by 280 bpts to 13.1 percent by the end of 2018.

Speaking to Financial Vanguard, on the declines in the income of merchant banks in the financial year 2018, Ayo Akinwunmi, Head of Research, FSDH Merchant Bank said: “Lower interest rate and yield environment on fixed income securities in 2018 compared with 2017 were responsible.”

Similarly, Guy Czartorysk, Head, Research, Coronation Merchant Bank said: “Loan growth for merchant banks was low in 2018 which negatively impacted interest income. “Understandably, merchant banks were cautious in extending risk assets in a low-growth economic environment, with Gross Domestic Product (GDP) growing by just 1.93 percent during the year.

“In addition yields available in risk-free interest rate products, which could have improved interest income, notably 364day T-bills, averaged 14.65 percent in 2018, which is a significant decline when compared to the average yield of 21.75 percent in 2017.”

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Mixed performance

The above development occasioned mixed performances in the interest income and interest earnings of four of the five merchant banks, which led to general decline in net interest income.

The general decline was led by FBNQuest with 37 percent decline in net interest income, which fell to N4.4 billion in 2018 from N6.95 billion in 2017.

This was caused by 13 percent decline in interest income which dropped to N16.6 billion in 2018 from N19.1 billion in 2017, while interest expense remained flat at N12.2 billion in 2018.

FSDH Merchant Bank suffered the second highest decline in net interest income. Interest income fell by 30 percent to N5.4 billion in 2018 from N7.7 billion in 2017.

This was caused by 24 percent decline in interest income to N15.7 billion in 2018 from N20.6 billion in 2017, though interest expense fell  by 20 percent during the period.

Rand Merchant Bank Nigeria suffered 7.6 percent decline in net interest income which fell to N4.8 billion in 2018 from N5.2 billion in 2017.

This was caused by 106 percent increase in interest expense which rose to N10.1 billion in 2018 from N4.9 billion in 2017. This wiped out the 50 percent growth recorded in interest income during the period.

Also, Coronation Merchant Bank recorded modest decline of 5.0 percent in interest income, which fell to N7.6 billion in 2018 from N8 billion in 2017. This was caused by 19 percent increase in interest expense which rose to N17.1 billion in 2018 from N14.4 billion in 2017. This wiped out the 10 percent increase in interest income recorded during the period.


Marginal growth in gross earnings

As a result, total earnings for the five banks grew marginally by  six percent to N111.7 billion in 2018 from N104.3 billion in 2017, driven largely by 14 percent increase in fees and commission, 142 percent increase in foreign exchange trading, and 4.6 percent increase in value of fixed income instruments.

Cumulatively the five banks recorded N16.4 billion as fees and commission income in 2018, up by 14 percent from N14.44 billion in 2017.

Income from foreign exchange trading rose by 142 percent to N6.3 billion in 2018 from N2.5 billion in 2017, while income from fixed income instruments rose by 4.6 percent to N6.3 billion in 2018 from N6.1 billion in 2017.

The above helped the five banks to achieve 27 percent growth in profitability, with profit before tax (PBT) rising to N39.4 billion in 2018 from N28.9 billion in 2017.


Growing non-interest income

Consequently, to enhance revenue growth and sustain the double digit growth in profitability, the five merchant banks are consolidating on strategies to enhance non-interest income as well as attract stable source of funds.

These include Commercial Papers (CPs) issuance and deployment of information technology platforms to enhance deposits mobilisation and transactions fees through electronic banking.

In this regard, FSDH Merchant Bank, which recorded 17 percent decline in revenue as well as 14.8 percent decline in deposits in 2018 raised N15 billion in 2018 under its N30 billion Commercial Issuance programme which commenced in 2016. The bank also stepped up its IT strategy by employing an Executive Director to oversee the implementation of its digital strategy.

In response to Financial Vanguard enquiries, Managing Director/Chief Executive, FSDH Merchant Bank, Mrs Hamda Ambah, said: “We understand that IT is a critical aspect of our operations. We do not intend to grow by bricks and mortar and branches; the way to reach out now is via technology. “As a merchant bank there are some restrictions that we have in terms of minimum deposit size that we can take. But by the use of technology some of the distinctions that existed between us and commercial banks are disappearing.

“For instance as a merchant bank I can’t issue cheque books to my clients but the question is how many clients are interested in cheque books today, everybody is transferring online, so some of those problems are disappearing.

“We are going to further leverage on our technology to bring in funds and bring it in cheaply like commercial banks”

On the rationale for the bank’s CP programme, she said: “The beauty of going down the commercial paper route is that somebody can make a deposit of 90 days and after one week come back to collect that money. Though you are not bound to give him the money because, strictly speaking, it is a contract but as a merchant bank we dare not give them back because it can affect your reputation.

“But when they buy CPs, that is an instrument, they can’t come back to demand for their money. They either hold it to maturity or sell it to somebody else. So these are some of the approaches we have deployed to manage our balance sheet better”.

Similarly, Coronation Merchant Bank tapped into the CP market to raise N15 billion under its N100 billion CP issuance programme which commenced last year.

The bank also expedited measures to increase income from foreign exchange and fixed income trading as well as from electronic channels.

Speaking in this regard, Group Managing Director/Chief Executive, Coronation Merchant Bank,  Abu Jimoh, said: “The bank’s commercial paper product which was launched in the year helped to provide a relatively stable funding base to support our growth. Earning assets grew significantly by 70 percent year-on-year, to cushion the huge gap from reduced market-driven decline in yield.

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“There was increase in foreign exchange and fixed income trading volumes, loan disbursement, e-channel transactions which saw the bank’s non-interest income increase by 46 percent y/y to achieve N4.1 billion in 2018 from N2.8 billion in 2017.”

Rand Merchant Bank, on its part, also commenced efforts to leverage on IT to revamp revenue growth in the face of 7.6 decline in  net interest income in 2018.

The bank which grew its foreign exchange income by 143 percent to N5.1 billion in 2018 from N2.1 billion in 2017 but struggled to grow its fees and commission income by just 2.3 percent in 2018, recently deployed an online banking transaction platform known as RMB Digital, aimed at attracting more customer transactions to enhancing fees and commission income.

The bank in a statement said: “Funds may be transferred internally or across borders, beneficiary advisories may be sent to third parties; payment advisories may be generated on all transactions; and instant payments could be processed” on the platform, known as RMB Digital.

Michael Labie, Chief Executive Officer of the bank, stated: “By integrating traditional banking with the online banking experience, we will build and foster a stronger connection with our clients and have a deeper level of customer engagement.”


Interest income outlook

Guy Czartoryski of Coronation Merchant Bank,  however, expressed optimism that the negative trend in interest income can be reversed in 2019 if merchant banks increase lending activities.

“The real story is still lending.  Who will resume lending? 2019 presents a golden opportunity for banks to expand loan books and gain market share.They are coming off a low base; lending has hardly grown over two years, but the economic conditions look good for renewed loan growth. Asset quality is improving, we believe, and the well-capitalised banks will be able to grow their bottom line if they choose to grow loans”, he said.

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