A step up in economic growth in the 2020 fiscal year is expected to moderate the macroeconomic weakness that impacted negatively on the banking sector’s stability in 2019. This is expected to provide room for revenue improvement while bank managements will try to keep costs under control. Yet, to translate the revenue gains into profit improvements will be the challenge for bank managements this year.
The effort to keep costs under control will most likely have a limited success. Two major cost elements of banks – interest expenses and loan impairment charges will be largely outside of managements’ controls. Only operating cost – where a lot of cost cutting has happened already, may be subject to further pruning in the year.
The Central Bank’s retention of the 65 percent loan deposit ratio means that the pressure on banks to grow risk asset portfolios will be sustained for the second year. Growth expectations for the economy aren’t likely to be strong enough to warrant substantial growth of the loan portfolio at this time. The implication is that the bad loan book will remain big and that can be expected to keep interest income – the main line of bank earnings significantly constrained.
Monetary policy makers are likely to come under fresh pressure to cut benchmark interest rate, which they are quite likely to resist. Consequently, high cost of funds can he expected to hurt both banks and businesses again this year – limiting loan repayment capability of borrowers and squeezing net interest income. Inability of banks to grow interest income ahead of interest expenses may therefore persist in 2020.
The bulk of bank credit is concentrated in the industrial sector, which isn’t expected to be among the growth leading sectors in the year. Industrial GDP has maintained a contracting trend in recent years and isn’t expected to offer a fertile ground for bank loan expansion in 2020. It is therefore expected that bank strategists will seek diversification of their risk asset content from corporates to retail customers.
Bank lending here follows bandwagon back and forth movements that get every bank trapped in crisis. Before the 2008 financial crisis, banks generally plunged into retail lending and built massive portfolios of margin facilities. The crisis that followed melted credit portfolios of all the banks and created trillions of naira of toxic assets. In effect, banks abandoned retail lending and went headlong into oil and gas financing.
The collapse of oil prices in 2015 again hit all the banks, creating credit losses of N1.5 trillion in four years to 2018. Banks are therefore at the verge of turning attention once again to retail lending. The move towards retail lending focus began last year and is expected to be extended in 2020. Salaried workers will be the central focus but small and micro enterprises and artisans are likely to get increased attention in pursuit of bank portfolio restructuring strategy.
Frequent bubble and burst of bank credit portfolios is traced to lack of adequate diversification between corporate and retail customers and across sectors and industries. Bankers themselves point to lack of sufficient depth of the economy, which doesn’t permit specialisation in different sectors and activities.
The difficulties in the banking sector stem from concentration of bank assets in the declining industrial sector. Bank managements could not balance the volatile behaviour of the industrial sector with the resilient performance of the agricultural business. This structure is expected to be largely in place in 2020.
The problem of loan recovery difficulties facing banks is therefore likely to remain this year. Though the oil market is expected to be generally stable through the year, the fortunes of companies that are heavily dependent on foreign inputs will likely continue to fluctuate with the general oil market volatility.
Some recovery in crude oil prices in 2018 moderated credit losses for banks, leading to significant recoveries and write backs witnessed in the year. The tempo went down in 2019 and some banks reverted to building loan impairment expenses once again. With the regulatory pressure on banks to lend being enforced for the second year, rising loan loss expenses seems to be a problem that would confront bank managements generally in 2020.
Loan recovery prospects are also dimmed by a structural shift that has happened in the market such that crude oil prices are no longer a function of just a normal trade cycle. The indication is that oil prices may never climb back to the level at which many bank facilities were created at least in the short-term. Any gains in oil prices thus offers banks no more than a flicker of opportunity to cut and run from highly vulnerable sectors and from highly concentrated credit areas.
Bank credit analysts are expected to learn deep lessons from the differing sectoral behaviours of the economy in restructuring their portfolios. Any bank that has a fairly even spread of risk assets across the three broad economic sectors – agriculture, industry and services are very likely to achieve a better average portfolio quality than others concentrating in one major sector. Credit losses will expectedly be much less for a bank where agricultural and agro allied assets are large enough to counter the impaired values in the industrial sector.
How each bank will fare in 2020 depends critically on how managements are able to achieve a diversified portfolio that balances volatility, stability and growth dynamics across different sectors and industries. A good balancing will empower growth in interest income – which every bank needs to outgrow interest expenses and deliver improved net interest income in the year.
Most banks have sustained declining net interest incomes for some years now and have been applying cost savings from loan recoveries to defend profit. That escape route isn’t likely to be available in 2020 with the expectation that loan loss expenses will be on the rise again.
Growing revenue ahead of costs leaves the only route for profit building by banks this year. Banks unable to drive earnings growth hard enough and deliver improved net interest income are very likely to lose profit in 2020.
Impairment Charges for Credit Losses Nm
| BANK | 2014 | 2015 | 2016 | 2017 | 2018 | Q3 2019 |
| Access | 11,652.30 | 14,224.70 | 21,952.80 | 34,467 | 14,657 | 10,611 |
| UBA | 6,578 | 5,053 | 29,898 | 32,895 | 4,529 | 6,663 |
| Zenith | 13,064 | 15,673 | 32,350 | 98,227 | 18,372 | 18,259 |
| GTB | 7,098 | 12,408 | 65,290 | 12,169 | 4,906 | 2,762 |
| FBNH | 25,942 | 119,322 | 222,908 | 150,424 | 86,911 | 28,460 |
| Stanbic-IBTC | 3,217 | 14,913 | 19,803 | 25,577 | -2,940 | -4,136 |
| Sterling | 7,389 | 8,151 | 11,714 | 12,267 | 5,843 | 3,910 |
| Fidelity | 4,306 | 5,764 | 8,671 | 11,315 | 4,215 | 630 |
| Union | 4,828 | 9,948 | 16,582 | 25,609 | -3,374 | -462 |
| Unity | 15,054 | 27,122 | 35,949 | 44,254 | 161 | 684 |
| Diamond | 26,371 | 55,172 | 59,024 | ——- | ——- | |
| Wema | 88 | -78 | -412 | 2,180 | 3,510 | 801 |
| FCMB | 10,640 | 15,033 | 35,552 | 22,667 | 14,113 | 7,852 |
| Skye | 18,992 | 21,536 | NA | —— | —— | |
| Total | 155,220 | 324,243 | 441,234 | 472,051 | 150,903 | 76,034 |
Source: Annual Reports & Statement of Accounts
