Nigerian banks suffer N135.6bn decline in interest income in HY18 on falling securities yield, flat loan growth

It appears most banks’ bet on securities to hedge against incurring non-performing assets have gone awry, as declining yields on the securities have put a damper on interest income.

A business a.m. analysis of top banks’ earnings as at end-June 2018 indicates a 16 percent decline in interest income, the main income from their business of intermediation, from the numbers recorded in prior year.

The analysis carried out with half year results for the period ended 30th June 2018 on seven banks listed at the Nigerian Stock Exchange, show interest income fell by N135.6 billion in June 2018 when compared with the numbers recorded in June 2017.

The banks reviewed were Diamond Bank, FBN Holdings, First City Monument Bank (FCMB), Guaranty Trust Bank (GTBank), Sterling Bank, Wema Bank, and Zenith Bank.

business a.m. had in June reported a worrying trend in the banking sector where banks seem to prefer investments in securities to growing their loan books as a measure of avoiding creating non-performing assets.

Their bets, however, did not pan out as expected as declining yields in the securities segment occasioned by government turning to Eurobonds to borrow to fund its budgets brought yields crashing.

“A major causative factor for significant reduction in bank’s interest income in the Nigerian economy is declining yield on government securities,” said Oluwarotimi Olayanju a credit risk manager in Lagos.

Olayanju explained to business a.m. that the federal government’s decision to restructure its debt portfolio by substituting domestic loan with foreign loan through the apex bank gave rise to decrease in returns on treasury bills.

“It is worthy of note to state that a few of the top Nigerian banks have their interest-bearing assets in government securities. The magnitude of impact is highly correlated with the duration of individual banks treasury security portfolio, the sensitivity of their asset yield to interest rate as well as willingness and potential to raise their loan portfolio,” he said.

The analysis revealed that Sterling and FCMB were the only banks that recorded a positive growth in interest income during the review period.

Sterling Bank’s interest income appreciated 25 percent to N62.6 billion while FCMB grew same line item by 3 percent to N64.3 billion.

On the other hand, FBN Holdings recorded the largest decline of 49 percent, in interest income that closed the period lower at N114.6 billion.

Following FBN is Zenith, which though earned the biggest value from interest income amongst the banks analysed, recorded a 13 percent drop from the numbers earned in 2017.

Zenith recorded N228.7 billion as interest income as at June 2018 against N262.3 billion earned the same period while GTBank, Diamond and Wema Bank recorded marginal declines of 2.4 percent, 2.1 percent and 0.2 percent in interest income respectively.

Speaking on how banks could reduce the risk associated with such exposure Olayanju said it is necessary for banks to minimize risk level of their credit portfolios and focus on diversification of loan portfolio on less risky sectors of the economy.

“A well-structured and managed credit system would help to mitigate the default risk of borrowers, this can be achieved through effective utilization of BVN, collateral registry and credit bureau system.”

Interestingly, interest expense, which is the cost incurred by the banks on borrowed funds also reduced significantly (17.6%), indicating reduced borrowings or stiffer competitive rates.

For Tier-I and Tier-II commercial banks operating in Nigeria, interest expense were expected to increase marginally, as a result of tight monetary environment leading to rise in cost of funding amidst not too impressive deposit mobilization from customers.

Other contributory factors are foreign debt payment expense as well as interest paid on customers fixed deposit investments.