Banks play safe as loan books contract amid high T-bill yields

By Moses Obajemu & Oluwaseun Afolabi

Banks in the country continue to play safe with their funds as they channel the bulk of their loanable funds into government securities, especially treasury bills, which offer appreciable returns and little or no prospect of being lost or eroded.

The result of their cautious application of funds is the persistence of the unsavoury story of the poor growth of their loan books which hampers credit creation and expansion.

But despite an improved economic outlook and the expected increase in loan demand, analysts say that the attractive yields in the money market may lead to a slight movement in bank’s loan books.

According to Bukky Aregbesola, team leader, fixed income at Access Bank, the treasury bills and bond markets are the trending market at the moment and if the yield can continue as it is currently, it will be impossible to see any significant change in bank’s loan to customers.

Aregbesola said, “I have seen the figures of loan to customers of the top banks and most of them were in the decline, but looking towards the end of this year, and taking into consideration the recently released report on credit condition, I still feel that there will be no major movements in the loan books because the majority of investors are still banking on the treasury bill and bond market.”

Peter Moses, economist and investment research analyst at Cordros Capital Limited, said as long as the underlying factors which impede growth of business activities in the country are not addressed, banks would continue to be wary of increasing lending.

“Deposit Money Banks (DMBs) are largely aware that the high cost of doing business in Nigeria, elicited by infrastructural decay, multiple taxation, land ownership structure, enforcing contracts, inter alia, more than anything else, significantly increases the risk of loan default.

 “We believe DMBs’ risk averseness to credit creation will continue to play out, at least in the short term, considering still-attractive returns on government securities,” he stated, adding that, “it is rather difficult to accurately assess the potential impact of that without further details and framework cum modus operandi.”

Last year, commercial banks in the country were averse to lending as the loan books of most of the banks showed a declining trend bringing the total credit to customers by nine banks to N10.337 trillion in the first half of 2018. This is 7.2 per cent shy of the N11.138 trillion total loan book of the nine banks at the end of the 2017 financial year. 2018 financials released by Guaranty Trust Bank, Zenith Bank, Union Bank, FBN Holdings, Ecobank Transnational, Diamond Bank, First City Monument Bank, Wema Bank and Sterling Bank showed that only two banks had recorded growth in their loan books.

According to the Q1 2019 Credit Conditions Survey Report by the statistics department of the Central Bank of Nigeria, availability of unsecured credit to households increased in Q1 2019, but it was expected to contract in Q2 2019. Most lenders adduced a higher appetite for risk for this increase, according to the survey.

The overall availability of credit to the corporate sector increased in Q1 2019 and was expected to increase in the next quarter.

Demand for secured lending for house purchase decreased in Q1 2019, but more lenders expected demand for secured lending to increase in the next quarter. The survey said the proportion of loan applications approved increased even though lenders tightened the credit scoring criteria.

Demand for total unsecured lending from households increased in Q1 2019 and was expected to increase in the next quarter.

Despite lenders’ resolve to leave the credit scoring criteria unchanged, the proportion of approved unsecured loan applications decreased in the current quarter but was expected to increase in the next quarter. Lenders reported increased demand for corporate credit from all firm sizes in Q1 2019. They also expect increased demand from all firm sizes in the next quarter.

According to the survey, secured loan performance, as measured by default rates, improved in the review quarter, and lenders still expect lower default rates in the next quarter.

Total unsecured loan performance to households, as measured by default rates, deteriorated in Q1 2019 but was expected to improve in the next quarter. Corporate loan performance improved across all sizes of firms in the current quarter.

Lenders generally expected lower default rates for all firm sizes in the next quarter. It stated that lenders reported that the overall spreads on secured lending rates on approved new loans to households relative to MPR remained unchanged in Q1 2019, and was expected to narrow in the next quarter.