An international credit rating agency, Fitch Rating has predicted that commercial banks operating in Nigeria may find it challenging to sustain profitability in 2018, given the decline in net Treasury Bill (T-bill) issuance programme in the first quarter of 2018.
The rating agency noted that the Central Bank of Nigeria (CBN) Treasury Bill (T-Bills) slowdown may impact negatively on Nigerian Banks profits in 2018, with the likes of Guaranty Trust bank Plc, Zenith Bank and United Bank for Africa Plc, among others, may find it more difficult to sustain profitability during the year. Coupon rates on T-Bill and bond were reduced as the Federal Government looks to increase its financing from external sources and longer-dated domestic issuance. According to Fitch, “We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018.
The CBN’s latest issuance schedule shows N1.1 trillion ( of rollovers in first quarter of 2018 against N1.3 trillion of maturing bills. In 2017, rollovers fully covered maturing bills.
“Performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains and rising loan impairment charges, but the largest banks are best placed to withstand these challenges,” Fitch said. According to Fitch, record T-bill issuance in 2017 helped support the Central Bank of Nigeria (CBN)’s strategy to maintain stability at the foreign exchange market as global oil prices continued to rally.
The report by Fitch said, “High yields on T-bills issued in 2017 (around 13per cent-14per cent on 90-day T-bills) attracted investors and helped to support the naira. “An increase in oil export earnings and the introduction in April 2017 of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism, commonly referred to as the Investors and Exporters’ FX Window (I & E FX), also helped naira stabilisation during the second half of 2017.”
“Nigerian banks are highly reliant on net interest income for profitability and T-bills proved to be an important source of profits in 2017. “Interest on securities represented 30 per cent of total gross interest earned in nine months of 2017, averaged across Nigerian banks rated by Fitch (2016: 23 per cent),” the report by Fitch explained. Fitch said as at nine months ended September 2017, federal government securities including T-bills represented more than 15per cent of the banks’ total assets as new lending fell, reflecting weak credit demand, tighter underwriting standards and banks’ reluctance to extend new loans as they focused on extensive restructuring of troubled oil-related and other portfolios. The report on five Nigerian banks stocks stated: “Even the country’s largest banks cut back on new lending, with Guaranty Trust Bank’s (GTBank) stock of outstanding loans falling 10 per cent during nine months of 2017, FBN Holdings’ by 4.6 per cent, Zenith Bank’s by 3.7per cent and Access’s by 1.1 per cent. “United Bank for Africa’s loan book grew 5.6 per cent, but this is likely to have been driven by non-Nigerian lending as the bank operates in 22 other African countries.
“Fitch noted that GTBank has one of the highest Return On Average Equity (ROAE) followed by Zenith Bank and Access Bank as at nine months ended September 30, 2017. The report revealed that banks with four to six per cent ROAE may struggle to remain in profitability this year.
“Operating returns are still strong at GTBank (9M17 (ROAE): 37 per cent), Zenith (28 per cent), UBA (22 per cent) and Access (20 per cent), while FBNH’s operating ROAE is lower (12 per cent) but improving. “However, some second-tier banks with nine months of 2017 operating ROAE of four per cent-six per cent may struggle to remain profitable in 2018,” the report added.