Nigerian Banks to Benefit from Rising Interest Rate
Deposit money banks in Nigeria have been listed among other emerging market financial services operators that will benefit from rising interest rates. Details from the second quarter financial statement submitted to the Nigerian Exchange showed that local banks have started reporting higher interest income while they grow their loan books.
The aggregate industry’s interest income had been pressured by a low-interest rate environment engineered by the monetary authority to drive economic growth via lending to the real sector of the economy.
Consequently, interest yields on assets were down while banks battle rising inflation which impacted operating expenses strongly, though their respective funding costs were low.
Local banks’ interest income has improved following the monetary policy committee of the Central Bank of Nigeria’s fast and furious hawkish move in May, and then in July 2022 which lifted the policy rate to 14%, up 250 basis points from 11.50%.
Also, income from their investment securities line improved as the yield curve inched higher in the fixed income market after an interest rate hike, according to the second quarter performance scorecards.
Rising interest rates are positive for banks’ credit profiles in most Europe, Middle-East and Africa emerging markets (EMs), Fitch Ratings says in a new report covering 13 major EMs.
In most cases, the overall impact should be credit positive as higher rates will boost net interest margins, supporting operating profits, it said. READ:CBN’s Lending to Deposit Money Banks Hits 2020 High
However, Fitch believes that the positive credit impact will be partially offset by lower credit demand and risks to asset quality due to macroeconomic pressures.
Net Interest Margins to Improve: Higher interest rates will strengthen banks’ net interest margins, helped by generally favourable balance-sheet structures, according to the report.
It stated that lending rates will increase more than funding costs, with many banks benefiting immediately due to a high proportion of floating-rate lending. Nigerian banks see their net margins improve in the second half due to monetary policy tightening.
“Banks in most of the markets have reasonable ability to pass on higher rates to borrowers. However, in some markets, they may be constrained by regulatory restrictions, competitive pressure or asset-quality considerations.
“Banks whose funding is dominated by low-cost current and savings accounts will benefit the most from higher interest rates given the limited interest rate pass-through on such accounts”. In some cases, according to Fitch Ratings, good liquidity buffers will limit the pressure to offer higher rates to savers to maintain deposit levels.
“We expect asset quality to deteriorate in most of the markets as high inflation and rising interest rates put pressure on borrowers, and economies slow. Credit demand is also likely to weaken”, it added.
According to the report, some lending segments are more pressured due to their cyclical nature, higher leverage, unhedged FX risk or lingering effects of the pandemic. Central and Eastern European markets are particularly exposed to the disruption in Russian gas supplies.
Impaired loan ratios are still low, and loss-absorption buffers are generally adequate, Fitch stated. However, uncertainty remains about the potential impact of the energy crisis on households and businesses, particularly in Central and Eastern European markets, while government policy responses are still taking shape.
It said banks in commodity-exporting countries have better prospects due to the recent surge in commodity prices, which underpins domestic economies, supporting loan demand and asset quality.
# Nigerian Banks to Benefit from Rising Interest Rate#
