EXCLUSIVE! Innovate or die: Banks caught between a rock and a hard place

The macroeconomic and policy environments are putting banks on horns of a dilemma. They either increase risk assets creation or mark up investment in securities to earn incomes. Whichever way they choose they would be faced with challenges of maintaining healthy interest margins.

The macroeconomic environment where businesses are struggling to run as going concerns would put the option of bullish loan book growth to the test of incurring non-performing assets.

Likewise, the recent policy environment where the government has chosen to borrow offshore as well as declining rates at the fixed income markets would, apart from reducing their net margins, force them to lower their interest on liabilities, thereby discouraging customers from placing large deposits with them.

Again, a pronouncement by the Central Bank of Nigeria that it would start penalizing banks with huge investments in securities is a challenge for the banks to restrategise for increased interest earnings, which by their role of intermediation, is their traditional source of revenue.

The prevailing circumstances, therefore, put banks in dire straits as more entrants in the form of fintech and payday loan givers are taking a chunk of their intermediation market share.

We are often told that when the banks sneeze the whole economy catches a cold. This has been the case in the past two years, as the slow pace of lending growth has put the economy on the brinks with businesses struggling to access finance.

The banks have been overly cautious to lend despite the high interest rate regime because of growing incidences of non-performing loans as repayments become difficult.

Banks in the main are to take up deposits from consumers and businesses and in turn, lend the deposits to companies and consumers for interest earnings. Alternatively, these funds can also be invested in interest yielding financial securities.

Although a business a.m. analysis of the first quarter financial results of the five-tier-1 banks in Nigeria shows a six percent increase in their combined net interest income from N311.35 billion in Q1 2017 to N329.53 billion in 2018, a significant composition of the income came from investment in securities, which grew at a faster pace when compared to the growth on loans and advances.

The banks grew their net interest income to N187.17 billion from N151.66 billion, representing a growth of 23 percent. On the other hand, the banks’ loans and advances to customers, as well as to other banks, show a marginal growth of four percent in the quarter under review.

Of the tier-1 banks, Zenith Bank Nigeria Plc. had the highest net interest income with equally the largest increase in its gains from investment in securities. The bank’s net income figure increased from N70.60 billion to N95.90 billion in Q1 2018, a 36 percent jump.

Zenith also recorded a 66 percent increase in income from investment securities for the period showing N63.67 billion from N38.32 billion recorded a year earlier, but its loans to customers and bank figure dropped by two percent in the period under review.

Explaining the rationale behind banks’ interest in investment securities as a source of income, a source in the know of these transactions told business a.m.: “Banks might be more interested in investment securities because it’s easier and cheaper as a source of interest income.

“If they rely solely on giving out loans, my guess is that interest rate on loans will be slightly higher than it ought to be and an increase in interest rate discourages customers from obtaining loans,” he said.

The source, however, was not comfortable with the rising pace of investment in securities by the banks where rates went up as high as 18 percent, until recently.

“In my bank, for example, we reviewed interest rate in fixed deposits downwards yesterday (Tuesday), just because interests on investment securities are declining,” the source said.

Adding that, such development, will, unfortunately, discourage customers from bringing deposits. “They will rather look out for other investment options with higher yields.”

The source explained that either way, the bank, must, however, innovate around ways to sustain income.

In the breakdown of the analysis, UBA followed the pace set by Zenith bank by looking to make the most of their investment from securities.

Even though the bank’s loans to customers and banks figure increased by six percent from N48.80 billion to N51.57 billion in Q1 2018, UBA’s income from investment securities increased by 36 percent from 26.4 billion to N36 billion in the period. These variables facilitated the bank’s net interest income increased by four percent to N53.55 billion from N51.60 billion.

GTBank also recorded a four percent improvement in proceeds from investment securities in Q1 2018. However, this was not able to counter the effect of the eight percent drop in loans to customers and banks as its net interest income dropped by 10 percent from N66.1 billion to N59.7 billion.

Also recording a decline in its net interest income is FirstBank, with a six percent drop from N80.3 billion recorded in Q1 2017 to N75.8 billion in Q1 2018. In the same vein, the bank’s income from loans and advances to customers and banks dropped by two percent as the bank recorded N70.5 billion as against N72.3 billion, which was recorded in Q1 2017. Also hampering income from interest earned was a three percent decline in its investment securities, from N41.8 million in Q1 2017 to N40.4 billion

However, Access Bank saw its net interest income go up by four percent from Q1 2017 figure of N42.7 billion to N44.7 billion in Q1 2018. The increase was largely due to the bank’s income from loans to customers and banks, which increased by 29 percent to N74.2 billion from N57.7 billion of Q1 2017.

Though the loans and advances income figures for the banks under review are significantly higher than that of investment in securities, the slow pace of growth in the loans and advances calls for serious concern.

Research has shown that bank lending is statistically and economically linked to economic growth in Nigeria.

Studies have thus recommended that the federal government of Nigeria through the central bank of Nigeria (CBN) should strengthen the banking sector to ensure an improved credit flow to the activity sectors because of its strategic importance in creating and generating economic activities.

It is definitely a tough call for banks, but what is clear is that they must re-strategise, money has to be made, but their role as financial economic enablers must also be met.

As a way of improving income, most Nigerian banks have gone the way of strengthening their subsidiaries and upping stakes in their divestments. But even with all these, sustaining profitability has been difficult especially because of the decline in treasury bills yield and poor macroeconomic environment that encourages defaults.

Aside finding it excruciatingly difficult to generate interest income by way of advances, loans and investment in interest bearing instruments, generating deposit liabilities has been tough as savings among the populace has been far and wide. This is just as the few sources of the large deposits are pricy to the extent that cost of funds has risen to the roof.

To this end, the banks have hedged and become conservative in risk asset creation and became bullish with investment, which the recent rate regime in the securities market is trying to frustrate.

For the banks to survive as going concerns they must have to look at growing non-interest income and fees, which would require well-tailored products to suit each individual as well as research and advisory roles.

Another route for survival is technology to run slim and smart, thereby reducing redundancies while cutting cost.

On the aggregate, economic growth is deeply hinged on the ability of the banking sector in transferring created funds to the real sector.

“If a majority of these created funds is transferred to the real sector, economic growth will increase. If a small portion of created funds is transferred to the real sector, in this case, economic growth will occur in lower ratios due to lack of resources in the real sector,” an economic analyst explained.

He added that, “If savings accumulated in economic structure return to the economy as investments by using them to a great extent, they will provide an important contribution to the development of the economy. If a majority of these savings is not used, economic growth will slow down.

Indicative of the analyst’s submission in relation to the slow-paced lending our analysis unearthed among top-tier banks in Q1’2018 is the decline recorded in non-oil sector output during the first quarter of 2018.

This weighed heavily on the Nigerian economy, resulting in a gross domestic product (GDP) growth rate of 1.95 percent, down by -0.16 percent from 2.11 percent recorded in the fourth quarter of 2017.

The banks must not die; the handlers of the economy and the regulator should come out with growth policies, which the banks would help execute.

By Adesola Afolabi and Oluwaseun Afolabi