2017: Not so good a year for banks

The banking industry earnings season is yet to be over, but the results released so far by five banks, arguably in the top tier, the jury have been forced out and there is a strong verdict that the earnings outlook for some of the other banks that are yet to report may not be as rosy as those that have gone before them.

Despite the apparent good reports from Zenith, Guaranty, UBA, Access and Ecobank Transnational, some other large and midsized to smaller banks may be hard put to posting shareholders approving results.

According to business a.m. investigations, the subdued loan environment, which had industry loan growth flat at 0.2 percent for FY2017, constrained banks from delivering strong revenue and earnings growth.

Cost of doing business, pricing and fx-related premiums, which dried up early in 2017 on improved fx liquidity with the CBN introduction of the Importers and Exporters (I&E) window at the beginning of the second quarter were chief culprits.

In fact, H1 2017 profit before tax growth among banks had averaged 32 percent y/y, thanks to double-digit growth on forex and non-interest revenue lines. But that waned because the fx premiums banks fed on got whittled.

“Whilst the statistics on industry loan and deposit has not been provided by the CBN, we can only compute the industry earnings growth after all banks have released results. That been said, I can say that 2017 was generally a good year for banks, as the average tier-1 banks’ earnings growth stands at 14 percent, based on results released thus far,” an operator told business a.m.

He said a major challenge in the year was the relatively high cost of doing business. The inflationary environment and the lagged impact of 2016 naira devaluation that increased banks’ operating cost.

“In addition, the tight monetary policy environment, coupled with the liquidity sterilization measures of the CBN had a notable impact on the cost of funds, as customers sought higher interest rates in treasury bills and fixed-term deposits.”

In fact, the earnings situation for most banks is tough. business a.m. found, in the course of gathering information for this story, that an old generation bank may report less than N20 billion profit before taxation, while another would perform worse on non-performing loans overhang, which left them making provisioning that ate into their profits.

The scenario is even dire for many smaller banks that may report losses or at best trade flat on prior year performance.

The not too rosy situation, therefore, put a lie to the general assumptions that banks are making huge profits in a season of recession, according to an investment banker who said, the huge capital outlay of banks pale revenues, especially when seen against equity.

“A manufacturing concern who complains to you of being hampered by lack of access to loans, in fact, do more than most banks in terms of returns on equity,” he said as he gives a scenario of a company with equity of say N10 billion delivery revenue of N2 billion being better than a bank sitting on equity of over N700 billion delivering earnings of N100 billion.

“At the face value the bank has earned more but in terms of return on asset and equity, the manufacturer has done far better.” Again the retail segment, which is seen the world over as the future of banking, was buffeted by the prevailing harsh economic conditions in the last year with most banks having to contend more with corporate customers who have the privileges of negotiating rates. In other words, the high rate regime did not pan out well for most banks as there were no bankable projects, nor sustainable deposit to engender float income.

In fact cost of funds, especially in the last quarter of 2017 rose astronomically as fixed deposit rates rose to as high as 20 percent.

The banks are actually in the quandary as customer deposits are far and wide just as risk of defaults are increasing, no thanks to the harsh operating environment they and their customers operate.

The outlook for 2018 is equally grim, not with the government looking afield to borrow thereby tamping down on treasury issuances that the banks had fed as well as the expected easing in the economy, which may depress interest income.

But the good news is that retail segment may receive attention as more and more banks would look to onboarding the unbanked and underserved to broaden revenue. It may just be a good year for banks that did their homework.