Disruption, Restructuring to Shape Future of Banks Earnings
With the waves of disruptions, banks earnings have been projected to shift to non-interest assets driven amidst low interest rate environment.
Notably, analysts believe that banks have already started shifting focus to diversification of earnings sources as margin on loans shrinks across the industry.
In a note, analysts at CardinalStone Partner Limited stated that recent disclosures have served to re-enforce traditional banking limitations in the country, such as difficult value creation and competition from financial inclusion measures.
On the one hand, the firm said persisting credit-inhibiting macro weakness and regulatory constraints on investments in treasuries could limit the scope for sustained value creation in banks.
“While trading income has provided relative support for some banks, its susceptibility to volatility makes it a less sustainable strategy, in our view”, the firm explained.
It stressed that in recent years, banks have turned to fee-based income, especially in the retail space, as a strategic way out.
However, the disruptive emergence of fintech, partly to bridge the financial inclusion gap, is likely to threaten banks’ existing market share notably in the fee income space and may also imply a potential loss of new market capture.
In response, CardinalStone said banks are adopting varying digital strategies to manage the emerging disruption, ranging from strengthening agency banking platforms as in the case of FBNH and ACCESS to owning their payments platforms where ETI and GUARANTY are strongly deepening footprints.
CardinalStone explained that to ensure earnings resilience and sustained value creation, banks are turning to the diversification of their earnings base, with geographical spread and business restructurings (Holdco) the notable strategic plays.
“Per our assessment, banks with a Holdco structure grew earnings by 25.7% year on year on average in the first half of 20, outperforming their non-Holdco peers (+0.1% on average) as the industry reeled from the effects of the COVID-19 pandemic”, the firm stated.
Overall, CardinalStone believes the mid-term outlook of our coverage could be affected by strategic moves.
As an example, the firm considered ACCESS bank aggressive pan-African expansion and proposed transition to Holdco.
In the class is Ecobank Transnational Incorporation’s deepening of it payments business and resolution of the Nigerian dilemma.
This also include FBNH’s recent sale of its insurance arm and capital injection into the commercial bank following legacy book cleanup efforts.
Then, FCMB’s proposed acquisition of AIICO pensions to expand non-banking earnings contribution; FIDELITYBK’s quest for tier 1 status.
In the same way GUARANTY’s planned transition to Holdco structure; STANBIC’s planned onboarding of a life insurance business.
Just as UBA’s persisting Africa-wide strategy and; ZENITHBANK’s deeper retail foray and recent agency banking launch, as well as being open to exploit inorganic expansion opportunities.
Disruption, Restructuring to Share Future of Banks Earnings