Moderate declines in returns on equity, assets
Excess liquidity puts pressure on forex
NPL ratio deteriorates
By Emeka Anaeto, Business Editor
A recent review of the status of Nigeria’s banking industry at the backdrop of the adverse impact of COVID-19 on the overall economy has indicated sound fundamentals. But the policy powerhouse of the apex financial regulatory authority also hinted of some downside risks and weak links.
Vanguard’s analysis of the financial performance of the leading banks in Nigeria indicated a significant drop in revenue and profitability on industry-wide scale.
However, the personal positions of members of the Monetary Policy Committee, MPC, of the CBN has given a near-clean bill of health to the industry, while pointing to some red flags in the first quarter of 2021.
The MPC is the Nigeria’s monetary policy authority domiciled with the CBN.
The apex bank’s recent report indicates a positive impact of the estimated N2.3 trillion economic recovery and stimulus package rolled out against COVID-19 in the second quarter of 2020 through the first quarter of 2021.
Consequently, CBN says that a review of financial markets condition indicates a modest monetary expansion, with annualised M3 growth of 1.8 percent in February 2021. M3 is a collection of the money supply that includes broad money supply (M2) as well as large time deposits, institutional money market funds, short-term repurchase agreements, and larger liquid funds. M3 is closely associated with larger financial institutions and corporations than with small businesses and individuals.
The modest expansion recorded in February reflected the 18.1 percent annualised expansion in net domestic assets due to the 19.2 percent annualised increase in credit to core private sector.
Speaking on this, CBN Governor, Godwin Emefiele, said ‘‘the observed growth in private sector credit follows our various interventions aimed at spurring aggregate demand, stimulating output, and de-risking the productive activities.’’
Speaking on the spill-over effect of this money supply situation Emefiele stated: ‘‘Regardless of the increase in credit, the banking system remained relatively resilient with industry averages of the CAR (Capital Adequacy Ratio) at 15.2 percent, NPLs (Non-Performing Loans) ratio at 6.3 percent, and liquidity ratio at 40.5 percent.’’
He added that the apex bank will sustain its regulatory measures to foster banking system stability.
Commenting on the state of the banking industry, CBN’s Deputy Governor, Corporate Services Directorate, Adamu Lametek, said the prospects of improved domestic output in 2021 hinge mainly on effective liquidity support to the economy by banking industry with robust private credit and confidence building through predictable policy actions.
On liquidity support, he said the current stance of monetary policy, complemented by the development finance interventions should suffice.
On the situation in these areas so far this year, he stated: ‘‘Credit to the private sector remains robust due to some of the administrative actions around the cash reserve requirement (CRR) as well as the loan-to-deposit ratio (LDR) policy. As industry funding grows, the short- to-medium term outlook for new credit should continue to be positive. ‘‘Importantly, the banking industry fundamentals – particularly, CAR, NPLs and liquidity ratio – were impressive in the first quarter of 2021.
‘‘Barring any major shock, the banking industry is expected to remain resilient and supportive of economic expansion in the rest of the year.’’
Also commenting, Festus Adenikinju, another member of the CBN’s MPC, stated: ‘‘The Banking Stability Report shows that the banking industry remains stable and resilient. The Capital Adequacy Ratio, Non-Performing Loans Ratio and the Liquidity Ratio remain quite encouraging and not significantly different from where they were at the January 2021 meeting of the MPC. ‘‘However, there were moderate declines in Returns on Equity and Returns on Assets and a significant rise in the share of operating incomes in total interest incomes of Deposit Money Banks.
‘‘All measures of Bank Size, Total Assets, Credit and Deposits significantly rose year-on-year.
‘‘Over N4.56 trillion additional credit was created in the last one year, N300 billion in the last one month and N6.95 trillion of additional deposits.
‘‘Other Financial Institutions have also expanded credit appreciably, thereby providing credit support to women, workers, and informal sector operators, those that are discriminated against by the traditional banks. Data on the industry’s credit disbursement shows that 83.04% of banking creditors were able to access credit at below 15% lending rates.
‘‘However, the persistent high inflation figure, which is largely driven by structural factors, including insecurity all over the country, also has elements of monetary phenomenon, as Staff estimates show that broad money (M3) and net domestic credits were above their provisional levels in December 2020.’’
Adenikinju also expressed misgivings over the pass-through effect of money supply on the broader financial and macroeconomic space. He stated: ‘‘The liquidity in the economy is contributing to the pressures in the foreign exchange market as rational economic agents flee to safer currency amid low returns on fixed income assets and rising inflation rate. The planned huge budget deficit for 2021 Fiscal Year, will further fuel local inflation rate.’’
In her assessment, Aisha Ahmed, Deputy Governor, Financial Systems Stability Directorate and member of the MPC said the Nigerian payment and financial system continued to be resilient supporting the economy recovery, whilst sustaining sound financial indicators in the first quarter of 2021.
She stated: ‘‘Banking industry capital adequacy increased to 15.20 per cent in February 2021 from 15.10 per cent in December 2020 as a result of capitalization of year-end earnings. ‘‘Liquidity remained robust at 40.50 per cent, which is above the prudential minimum of 30.0 per cent whilst the Bank also has at its disposal sufficient Cash Reserve Requirement buffers to provide liquidity backstops to the industry as required.
‘‘Non-performing loan ratio deteriorated marginally from 6.10 per cent in December 2020 to 6.30 per cent in February 2021 in line with growth in the loan portfolio.
‘‘Most importantly, credit to the economy grew by N642.19 billion from N20.5 trillion at end-December 2020 to N21.1 trillion as at end-February 2021, with significant increases recorded in major sectors driving domestic GDP growth-manufacturing, agriculture, construction and general commerce.
‘‘Gross credit increased by N5.6 trillion between end-May 2019 and end-February 2021 due to the success of the Loan-to-Deposit Ratio policy which also helped to moderate loan pricing.’’
In her overall assessment Ahmed said maintaining the positive trajectory of credit growth, especially in critical sectors (manufacturing, retail & SMEs) will be instrumental to accelerating output growth in the short to medium term.
She, however sounded a note of warning, ‘‘Whilst the financial system has been crucial in propelling the economy out of recession, the CBN must remain vigilant and proactively anticipate and mitigate macroeconomic risks which may negatively impact the industry.
‘‘This is particularly important as the CBN reviews the status of regulatory forbearance granted to restructure credit exposures in sectors adversely impacted by COVID-19.
‘‘It is imperative that the banking sector builds adequate capital buffers to preserve resilience and enable it continuously deliver on its intermediation role in the economy on a sustainable basis’’.
Commenting on the credit deliveries of the banking industry, another member of the MPC, Ahmed Aliyu, stated: ‘‘Credit to the private sector grew by 1.36 percent to N30.5 trillion in January 2021 from N30.1trillion in December 2020. At an annualized rate of 16.32 percent, growth in credit to the private sector shot above the benchmark of 14.14 percent.’’
He also alluded to the soundness of the banking system, stating: ‘‘Financial soundness indicators remained stable and resilient. NPLs ratio which stood at 6.38 percent at end-February 2021, have over the past twelve months remained relatively flat and moderately above the prudential maximum of 5.0%.’’
Similarly, Folashodun Shonubi, also a member of the MPC believes that despite the adverse impact of the COVID-19 crises on the economy the Nigerian banking system is still very strong.
He stated: ‘‘The Nigerian banking system continued to show signs of resilience, even as it remained the major channel for sustaining the economy during the crisis and beyond.
‘‘Industry asset, deposit and credit grew further at end-February 2021. The average capital adequacy ratio improved to 15.2 per cent, against 15.0 per cent regulatory threshold, while industry liquidity ratio, at 44.5 per cent in February 2021, remained above regulatory threshold of 30.0 per cent. ‘‘Measures of profitability were positive, though the NPL ratio deteriorated marginally to 6.3 per cent, above the regulatory minimum of 5.0 per cent.’’
In addition to the resiliency, he also believes the stability in the banking system has enabled a significant positive impact on the overall economy.
Consequently, he stated: ‘‘Growth in credit to the Government, domestic claims and credit to private sector reflected impact of various measures by the CBN to promote flow of credit to drive economic activities.
‘‘Money market rates were moderated by ample banking system liquidity, buoyed mainly by inflow from maturing bills.
‘’Without doubt, the CBN’s policy of facilitating aggressive expansion of credit to promote output growth has had significant impact on the economy.
‘‘In this regard, the banking system has continued to be a veritable channel for supporting the expansion of economic activities through provision of easy and cheap credit.
‘‘Sustained resilience of the banking system, on account of effective regulation and supervision by the CBN provides assurance that the sector will continue to play this important role, without jeopardizing stability of the system.’’
However, one of the members of the MPC who saw things differently is not impressed with the industry profile so far this year. He is Chikwendu Asogwa.
According to him, ‘‘There is an observed weakness in bank performance indicators especially the rise in non-performing loans ratio from 6.1 percent in December 2020 to 6.3 percent in February 2021 as well as some decline in bank profitability within the same period.
‘‘While these marginal declines in bank performance indicators pose no threat to bank stability, it rather calls for more regulatory vigilance’’.
But Asogwa agreed with his other colleagues on the banking industry’s support to the economy. He stated: ‘‘Banking Sector credit gathered pace in February 2021 with a total of 95,583 new credits, thus expanding the total banking sector credit by over 4.0 percent compared to the level in December 2020. ‘‘This momentum is expected to continue in 2021, supported by strong liquidity in the domestic money market and the rise in lending to micro, small and medium enterprise (MSME) sector.
‘‘Of the total banking sector credit to the economy, net credit to Central Government continued to grow in February resulting in a notable acceleration of broad money.’’