Banks Double Down on Digital Operations, Some Branches Remain Shut
The outbreak of covid-19 has forced Nigerian banks to invest heavily in digital enable platforms to support business development and efficient service delivery as competition for customers wallets increase.
Many of the branches that were closed during the lockdown has not been re-open, many banks have maintained skeletal operations.
While this is expected to reduce their cost, more funds are being committed to digital enabled infrastructures.
Largely, 2020 has been a challenging year for lenders, but there is an indication that this has initiated a new digital movement – banks have reacted positively while adjusting to the new normal.
Thin margin on loans, apex bank loan to deposit ratio, competition with instance credit vendors and income disruption from telecoms firm have raised banks digital strategy above pre-pandemic level.
Due to offsite work opportunity, many Banks have failed to re-open their branches, not for Covid-19 reason but as an avenue to reduce operating costs amidst low interest rate environment.
At the moment, earnings sources available to banks have been reduced by the Nigeria’s central banks amidst rain of margin dilutive policies.
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The lender of last resort has maintained dovish stance on interest rate, thus forcing pressure on net margin.
Review of local banks financial statements also showed that investment income lines have also been pressured.
This is on account of low yields in the fixed income market which has dropped massively as average yield on secondary market Treasury Bill closed the week at 0.14%.
Yields on government instruments peaked at about 17% 2-3 years ago, but the ban placed on non-bank individuals from participating in the CBN’s primary market auction has resulted to strong liquidity.
As average interest income continues to slow down, Nigerian lenders have started doubling down on digital services and consumer lending.
In their separate financial statements for the third quarter of 2020, non-interest revenue supported lenders profitability as net interest income pull back.
This development has continued unabated due to the Central bank of Nigeria’s dovish interest rate policy.
Big companies are refinancing their debt book with cheaper debt instruments, thus putting cap on the market size on one hand, while banks struggle to build new market.
Banks have turned to big players in short term personal lending, not minding the risks of default. Though, some lenders claim that default rate has been low.
Most banks have put hedge in place, using salary account as basis for short term lending. Compare with instant credit facilities operators, borrowing short term from banks seems cheaper.
While some instant credit vendors charge remain abysmally high, pricing among banks appears low.
This seems to be more connected to risk profile, while banks are more conservative on who to extend short term credits, instant credit vendors take higher risk extending credits to various classes of people on pro-rate basis.
Nigerian lenders are strongly capitalised given the average industry capital adequacy ratio and asset quality remain strong with non-performing loan ratio below 6%.
With low interest rate environment, many are now looking to deliver more of their services digitally in the future.
The recent move to holding company structure speaks to the need to diversify earnings sources, just in the same spirit of Universal Banking system.
There is new normal, low interest rate and rising competition with instant credit vendors among other alternative payment channels.
The Covid-19 emergency has provided for another tough challenge for lenders. But the substantial efforts that banks have undertaken, under the guidance of the regulator, the Central Bank, have helped build the buffers to withstand such shocks.
Although many banks have had to boost their provision for problem loans, with an inevitable impact on wider sector profitability, capitalisation levels are still robust and revenues sufficiently flush to withstand the crisis.
Liquidity is expected to remain strong, in light of banks’ stable funding base and low levels of loan leverage.
Digital banking penetration have been accelerated as lenders turn to use of digital channels (mobile banking, ATMs etc) in increasing volumes to interact with their customer bases.
