A report from Coronation Research (a part of Coronation Merchant Bank Group) Has urged banks to either find other sources of income or face an average 15% drop in their Profits Before Tax expectation for 2018.
The report noted that for the banks to replace the portion of income threatened by declining yields on securities, they must grow risk-weighted assets. This means a 6-12% rise in customer loans in 2018.
According to the Head of Research, Guy Czartoryski, “for two years, Nigerian banks have had an easy time, earning good income on risk-free government-backed, Naira-denominated securities. That era is drawing to a close as T-bill rates fall. Asset yields are trending south, and it is almost impossible to re-price liabilities to match.
The report categorizes banks into three tiers; Group A, Group B and Group C. Banks in Group A, being the most well capitalized, have the biggest opportunity to increaseconsumer lending.
According to the report, Group A includes Zenith Bank, GT Bank and Stanbic IBTC, whichhave the ability to significantly expand their loan books by 69%, 82% and 182% respectively. Group B, including UBA, Access Bank and Fidelity Bank, have moderate capital levels and some ability to expand loans books but may also pursue tier II capital raise in the form of long-term subordinated debt. Group C, including FBNH, Diamond Bank and Sterling Bank, in the short to medium term have limited ability to expand their loans books and will most likely focus on dealing with capital issues and might attempt to raise long term capital from the capital market.
According to Coronation Research, “if equity markets are sufficiently strong, some banks might attempt equity capital increases (Tier-I) this year. However, currently we have market valuations so low as to make equity capital dilute the interest of existing shareholders. So, the preferred capital-raising route is likely to be long-term subordinated debt (Tier-II). We expect market share in customer lending to flow from banks in Group C towards those in Group A. With banks in Group B we see some, but perhaps not significant, market share gains.”
