Analysts Lower Estimates on Banks as Regulatory Risks Increase

Analysts covering the Nigerian Banks have started adjusting their estimate on lenders earnings expectations for the year on a dim outlook.

MarketForces gathered that most of the equity analysts have booked lower earnings projections for the first quarter, and down the year due to heighten risks.

Their decisions to adjust profitability forecast are not unconnected with the harsh economic environment among other factors.

In the recent time, banks are having it rough with dictates from the industry regulator. The directives would impacts lenders sources of earnings, covering both interest and non-interest sources.

In 2019, there were a number margin-dilutive directives calculated to pressure the Nigerian banks.

“Growth in the banking sector would be unattractive”, analysts at Tellimer, a London Headquarter emerging market firm, said in its outlook for the year.

Analysts at the firm stated that some Nigerian lenders are sensitive to down trend in interest rate.

Stressing this further, a team led by Guy Czartoryski, Head Research at Coronation Merchant Bank also painted that banks earnings may suffer somewhat from the Central Bank of Nigeria’s ( initiatives.

The CBN recent re-directional regulation targeted at increasing credits to the real sector raised competition among banks.

In the banking sector, investigations revealed that interest rates on different loan classes have moderated.

However, tracking the apex bank policies directions, many investment banking firms forecasted increase regulatory risk for operators.

Analysts’ consensus is that the hot-pan regulatory environment would dilute lenders earnings in the financial year 2020.

Tellimer is of the view that the Tier-I banks growth would be unattractive, though the emerging market focus investment firm maintains neutral outlook on overall risk.

The analysts expressed that limiting Banks placement to N2 billion on Standing Deposit Facility window reduced operators’ earnings among other issues.

They stressed that with the more recent cutbacks on charges on non-interest related banking services, banks profit performance would strongly be affected.

“Many of the CBN directives would automatically ease lenders earnings capabilities, the result of which is expected to be visible in the first quarter of 2020”, analysts held at roundtable organised by the MarketForces in Lagos at the weekend.

Some banks show high sensitivity to an expected down trend in interest rate, Tellimer stated in the review.

The firm’s outlook for the year held that key downside risk for Nigeria’s banks include non-interest revenue support from e-banking income.

Though, Tellimer projected non-interest income growth of 8% for Tier-1 bank and 15% for Tier-II operators as against median growth rate of 10% on global scale.

It also mentioned growth from rest of Africa operation as it emphasises volatile regulatory environment as downside risk.

“Nigerian Banks scan well from a valuation perspective, however their growth prospects appear limited”, Tellimer said.

The CBN has recently intensified move to re-channel credits to the real sector of the economy. It started by enforcing 60% loan to deposit ratio.

Meanwhile, at the end of the third quarter, after it sterilised about N500 billion from cash position of banks that failed to meet LDR requirement.

The CBN went ahead and raise the proportion of deposits that banks must lend to 65%.

This means that banks would need additional funds to shore up their capital base as percentage of deposit that should be extended to customers increased.

Also, the apex bank had cut their earnings from Standing Deposit Facility and limit possible earnings to N2 billion.

In the same manner, Banks were excluded from participating along with their clients in purchases of open market operation instruments.

This is happening at the time when yield on Treasury bill plummet. Many operators have in the past invested heavily in the fixed income market.

By doing that, they had maintained bearish stance on lending.

Analysts said over-concentration of loans in selective industries and market encourages the CBN to come up with the LDR ratio directives.

In their words, analysts said private sector was fund-starved because banks were making more from fixed interest market.

Analysts at Tellimer said the CBN move to stimulate economic growth by improving credit supply within the economy has potential negative implications on banks margin and assets quality.

Tellimer stressed further that the government recent decision to temporarily shut all land borders, re-organise the CBN’s Open Market Operations and introduce/raise taxes and levies could result in near term pressure on consumers and companies.

“These also have knock- on implications for banks profit”, analysts added.

Analysts stated that with payment service bank licenses now issued, banks are expected to face stiff competition for retail, digital customers. This also include transaction volume pressure.

Tellimer estimated an unattractive profit trajectory for Nigeria’s Tier-1 banks and increasing credit risk.

It would be recalled that earlier in July, the CBN announced Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) at 60%.

Meanwhile, in September, LDR target was reviewed upwards from 60% to 65% and all DMBs are required to attain the minimum LDR of 65% by December 31, 2019.

Priority areas include MSMEs, Retail, Mortgage and Consumer lending.

This upward review is following the 5.3% increase in credit to the private sector from N15.6 trillion in May to N16.4 trillion in September.

According to the CBN, failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall implied by the target LDR.

The CBN debited N500 billion from banks that failed to meet the 60% target in September.

“While this move is expected to further stimulate lending to key sectors of the economy, it could also result in a lower lending rate to businesses”, FSDH analysts said.

FSDH also note that forcing banks to lend to businesses, especially given the slow economic recovery has the potential to add pressures on banks.

It estimated that this may raise non-performing loans in 2020 when some of these loans become due. .

Analysts added that this will likely be offset by balance sheet expansion and a degree of interest rate protection from high yielding securities”.

“Not all the CBN changes help banks make money. The recently announced reduction in card maintenance and fund transfer fees is a negative development.

“This is especially in view of positive trend in fee and commission income in recent year in banks books.

“Re-pricing deposits when loan rates are falling is difficult. Also, growing loans rapidly may open the way increase non-performing loan”, Analysts said.

By Julius Alagbe

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