Tier-2 banks most profitable
But depositors’ confidence in tier-2 may wane — Market operators
By Peter Egwuatu
DESPITE the sluggish economic growth and headwinds recorded in the first half of 2019, HI’19, aggregate growth rate in topline (gross earnings) and bottom-line (Profit Before Tax, PBT) of both tier-1 and tier-2 banks listed on the Nigerian Stock Exchange, NSE, tipped up to 5 percent and 11.6 percent to N 2.2 trillion and N561.3 billion.
In the corresponding period of 2018 the figures were N2.1 trillion and N503.4 billion respectively.
The five tier-1 banks are First Bank of Nigeria, United Bank for Africa Plc (UBA), Zenith Bank Plc, Zenith Bank Plc, Guaranty Trust Bank Plc and Access Bank Plc. The remaining eight banks fall into the category of tier-2.
The tier-1 banks also outperformed tier-2 banks in both topline and bottom- line rising by 7.7 percent and 14.4 percent to N1.4 trillion and N411.7 billion. In the corresponding period of 2018 the figures were N1.3 trillion and N359.8 billion respectively. This shows a reversal of trend as the tier-2 banks had outperformed the tier-1 banks in H1’18.
But not only has the tier-1 banks bounced back to outperform tier-2, they have also outperformed the economy Year-on-Year, YoY, as their aggregate topline figures rose by 8.4 percent as against the Nigeria’s Gross Domestic Product, GDP, which grew by 1.94 percent YoY in real terms in Q2’19.
The economy measured by GDP, grew by 1.94 percent YoY in real terms in Q2’19.
Also contrary to the GDP trend, the tier-1 banks recorded impressive aggregate performance in Profit Before Tax, PBT, growing by 14.4 percent to N411.7 billion in H1’19 from N359.8 billion in H1’18.
Though tier-1 banks outperformed the tier-2 banks in absolute terms in both aggregate earnings and profits, some of the tier-2 banks were the fastest industry growth rate recorded.
Financial Vanguard three-year trend analysis shows that in H1’19, tier-1 banks aggregate topline figures was positive rising by 7.6 percent at N1.4 trillion from N1.3 trillion in HI’18 as against tier-2 which rose by 4.2 percent to N830 billion from N796.9 billion in H1’18.
Similarly, the tier-1 banks’ PBT grew by 14.4 percent to N411.7 billion from N359.8 billion in H1’18 as against tier-2 banks which rose by 4.2 percent to N149.6 billion from N143.5 billion in HI’18.
However, Financial Vanguard’s review indicated a reversal of trend as tier-1 banks’ aggregate topline figures was in the negative position in H1’18 recording a decline of about -7.6 percent at N1.2 trillion down from N1.3 trillion recorded in the corresponding period, HI’17 as against tier-2 banks which in H1’18 grew by 6.6 percent to N867.6 billion from N814.0 billion in H1’17. Also on the bottom-line figures, tier-2 banks’ PBT had outperformed tier-1 banks in H1’18 rising by 26.4 percent to N94.9 billion from N75.09 billion in HI’17 as tier-1 banks rose just 6.3 percent to N359.8 billion from N338.4 billion in H1’17.
Operators are worried
Meanwhile, capital market operators and stakeholders have raised alarm that the widening gap between tier-1 and tier-2 banks may lead to loss of depositors’ confidence in the tier-2 banks operating in the country except the tier-2 banks raise their capital base and enhance their competitiveness especially in services delivery with the use of technology among other measures.
A cursory review of the banking sector by Financial Vanguard shows that the 13 banks captured in this study recorded total gross earnings of N2.2 trillion in H1’19. This comprises of the following banks: UBA-294.032 billion, GTBank- N221.9 billion, Zenith Bank- N 331.6billion, Access Bank N324.4, FBN Holdings- N221.8 billion. Others are Wema Bank – N 40.8 billion, Stanbic IBTC Bank – N117.4 billion, Sterling Bank – N74.5 billion, ETI – N405.2 billion, Union Bank- N76.0 billion, FCMB- N89.8 billion and JAIZ Bank N5.7 billion.
Top 3 banks in gross earnings
Analysis of the top three banks on earnings in terms of absolute value shows that Ecobank Transnational Incorporated, ETI led the highest figure with N405.2 billion followed by Zenith Bank recording N331.6 billion. Access Bank posted N324.4 billion to occupy the third position.
On percentage terms, Jaiz Bank led the chart on gross earnings rising by 55.8 percent to N5.7 billion from N3.7 billion. It was followed by Access Bank which went by 28.2 percent to N324.4 billion from N253.0 billion in H1’18. Occupying the third position was Wema Bank recording 27.5 percent growth to N40.8 billion from N32.0 billion followed by Unity Bank which rose by 17.5 percent to N20.5 billion from N17.5 billion and UBA occupying fifth position as it went up by 13.9 percent to N294.0 billion from N258.0 billion.
Top 5 banks in PBT
Analysis of the top five banks in terms of absolute value for PBT is as follows: GTBank N109.6 billion, Zenith Bank N107.4 billion, Ecobank N65.1 billion, UBA N58.1 billion and Stanbic IBTC N50.7billon.
In percentage terms, Jaiz Bank topped the chart increasing by 292.6 percent to N5.7 billion from N3.7billion in H1’18. It was followed by Unity Bank recording 96.3 percent growth to N1.1 from N0.536 billion in H1’18.Access Bank recording 61.7 percent growth to N114.2 billion from N97.2 billion to occupy the third position.
The Chief Operating Officer, InvestData, Ambrose Omoriodon said: “The improvement recorded in the banking sector in H1’19 by both Tier-1 and Tier- 2 banks over the corresponding period in 2018 were due to the nature of service, improved technology, recovery of bad loan and refocus attention on retail banking that supported the top and bottom lines of the banks. The increase in PBT of the Tier 1 banks was as a result of high volume of transaction due to high number of customers and depositors.
“This trend of performance is likely to continue in Q3’19 as nothing has changed in the economy despite the resumption of the newly constituted cabinet that are expected to chat a new course for the economy. The banks with healthy numbers will maintain the tempo. Concerning the gap between Tier-1 and Tier-2, it might make depositors in Tier-2 bank reduce confidence. So the gap will continue. Yes, the gap can be bridged but not immediately with time as the second tier banks are expanding capacity to drive earnings.”
The Managing Director, APT Securities & Funds Limited, Mallam Garba Kurfi said: “The increase of 8.4 percent of the total gross income by Tier 1 is due to relative increase by Access Bank due to merger with Diamond Bank and UBA which is widely spread across Africa. Generally Tier-1 banks have spread across Africa which benefit from that synergy. While Tier-2 banks do not have similar synergy and the merger of Diamond Bank also serve as a lost to Tier- 2.
“The same with the PBT but also Tier-1 have lower cost of fund than Tier-2 whose mostly pay high interest rates to solicit for deposit that affect their profit. Our projection for Q3’19 is not likely to be different from what was in Q2’19 because of the insistence of CBN that Banks should have a ratio of 60/40 between lending and Deposit in order to promote more activities of the manufacturing sector of the economy.
“There is no likely sign that Tier-2 will bridge the gap that exist in Tier-1 because of cost factor in which Tier-1 have lower cost because of their size which Tier-2 are lacking and also the full implementation of Single Treasury Account is another added advantage for the big banks. The implication of higher gap is that Tier-2 banks may lose depositors to Tier-1 banks if the gap is not narrowed.”
The Head of Research and Investment, FSL Securities Limited, Mr. Victor Chiazor, said: “The banking sector for H1’19 have been resilient when compared with other sectors that have reported significant decline in earnings. The Tier-1 banks have continued to benefit from a wider network of branches and their ability to mobilise cheaper deposits. Tier 1 banks have also shown a much higher level of efficiency which has improved their profit margins when compared to Tier-2 banks.
“On the projection for Q319, performance is expected to be mixed with Tier-1 banks still expected to drive growth in the sector, despite economic activities remaining relatively slow. Regarding the gap between both tiers, we don’t expect any of the tier-2 banks in terms of growth in absolute value to catch up anytime soon except we see a surprise merger between two players in Tier -2 region.”
The spokesperson for Independent Shareholders Association of Niger, ISAN, Moses Igbrude, said: “Generally, I will commend the management of these banks whether they are Tier-1 or Tier-2 by classification. The business environment is tensed, harsh and very difficult. So for the banks to be able to come out with these type of results it is worthy of note. What makes a bank Tier-1 or Tier-2 is because of capital base or shareholders fund of such financial institution. If you have more money with you, you do more business and you make more profit. No matter how professional one is if the needed resources are not available one will struggle to do things.
“For Q3’19 projection, the trend of the Tier-1 posting higher results as compared to Tier 2 will follow the same pattern because of resources available to them as well as the prudent management of such assets. In terms of Tier-2 banks bridging the gap in Q3 will depend on the sound and efficient use of their assets by the management of the banks. Their focus should be on value addition and gradual growth not on higher profit to the detriment of the banks.”
The National Chairman, New Dimension Shareholders Association of Nigeria, Patrick Ajudua, said: “The capitalization of Tier-1 is quite higher than Tier-2 which also reflects in their ability to absorb risk. Therefore, the increase in Gross earnings by 8.4 percent when compared with 4.2 percent increase in Tier-2 is a measure of ability to absorb large business and some level of prudency.
“Tier-1 PBT is better than Tier-2 PBT simply because of better liquidity; improved Non Performing Loan, NPL, effective cost management and compliance with the prudency guideline. It is likely that both will maintain the same momentum going by the fact that they are just recovering from the declaration and payment of interim dividend. I don’t see Tier-2 bridging the gap in the short or medium period.”