'Economic, Regulatory Pressures to Suppress Banks Q2 Earnings by 8%'
Godwin Emefiele - Governor, Central Bank of Nigeria

‘Economic, Regulatory Pressures to Suppress Banks Q2 Earnings by 8%’

Amidst concern for economic recession which has generally clouded earnings outlook for 2020, analysts have estimated 8% cuts in banks second quarter earnings.

Analyst at GTI Capital Group, Damilare Asimiyu said overall, second quarter earnings results of most banks will reduce by an average of 8% compared to the corresponding period in 2019.

Asimiyu said based on available data, average Nigerian bank has 35% of its loan exposure to oil and gas sector.

“With the current low price of crude oil due to COVID-19 disruption, repaying those loans will be very difficult and banks’ balance sheet will feel the impact”, he said.

According to him, he said from all indications, second quarter earnings results of banks will come in disappointing.

'Economic, Regulatory Pressures to Suppress Banks Q2 Earnings by 8%'
Godwin Emefiele – Governor, Central Bank of Nigeria

This is because, COVID-19 disruption has negatively impacted all the major earnings sources of these institutions, he stated.

He further explained that for instance, from 2017-19, the good performance posted by most banks were driven by high earnings from trading activities.

This include the open market operations (OMO), Treasury Bills (T-Bills) and bond investment due to attractive yields.

Asimiyu however said this is no longer the case since the beginning of the year.

He stated further that some of the reforms made by CBN at the beginning of the year, such as reduced charges on online transaction and ATM charges will pressure the performance of these banks.

Nigerian lenders have been under pressure due to rising infection of COVID-19 pandemic, just as they face pressure from the apex bank.

Despite low economic activities, the Central Bank of Nigeria has failed to relax its loans to deposit ratio target of 65%.

This has led to about ₦2.5 trillion cash reserve ratio debits, now lenders have accessed ₦350 billion in Standing Lending Facility.

Analysts at Chapel Hill Denham said this is the peak point in the financial year 2020.

While analysts have predicted earnings cut for 2020, a large portion of the industry loans are expected to be restructured.

In the banking sector, due to inability to raise funding in the Eurobond market, lenders have resorted to raising loans through International Finance Corporation’s Working Capital Solution Envelope.

IFC’s WCS Envelope is designed to provide funding to its existing client banks in emerging markets that will then extend new trade-related or working capital loans to companies whose cash flows have been disrupted by the global outbreak of the corona virus pandemic.

A number of Banks like Zenith, FCMB other have accessed the credit line while Access Bank, FBNH others have also made applications.

Tellimer’s analysts explained that lenders’ Q2 earnings may be threaten on account of three times debits for failing to meet the regulatory requirements regarding lending.

The whole economic and regulatory scenarios are not presenting favourable condition for lenders balance sheet to expand, or for earnings to rev up in 2020.

Generally, analysts estimated that banks are expected to take sizeable revenues haircuts in 2020 as against their 2020 guidance.

It would be recalled at the first quarter 2020 earnings, Banks chief have explained that they may not be able to reflate performance.

The CBN is also adding pressure on funding.

Investment banking analysts noted that it appears that the CBN is deliberately locking out banks from making huge foreign exchange deposits.

Tellimer stated in an equity analysts report that the CBN is limiting banks’ abilities to bid for FX in the market as a way to keep Naira strong amidst dwindling foreign exchange reserves.

Looking at the industry, there are myriads of externalities plus regulatory demands that are expected to pressure earnings.

Dividend payment would be affected as the need to plough back retain earnings would help banks to strengthen capital adequacy ratio.

The decision that would mostly supported by the industry target relating to proportion of total deposits that must be extended as loans in the real sector.

At their separate conference call with analysts, some Banks indicate that due to development in the economy, their performance may fall short of their initial guidance.

Booming with optimistic that economy would spike in 2020, Tier-I capital banks had set ambitious targets.

Speaking at earnings call with analysts recently, Nnamdi Okonkwo the Managing Director and Chief Executive Officer at Fidelity Bank Plc adjusted its projected profit metrics down by 15%.

Trend like this would affect dividend payment among bulge balance sheet banks with combine total assets at N30 trillion.

Unfortunately, more of the industry’s risk assets are now in the real sector of the economy that are not performing as earlier rated.

United Capital however said ability to withstand this pressure depends on structure of the bank, net foreign exchange position and perhaps hedge contracts for those that have oil and gas exposures.

Analysts said top banks like GTB, Zenith, Access, UBA and FBN has high exposure to oil and gas industry.

Banks Go to IFC for Emergency Working Capital Support

Due to the high loans concentration in this segment, and the fact that the industry is under facing massive prices reduction, operators’ loans may not perform.

Average non-performing loans in the banking sector may shoot up as high as 250 basis points, analysts stated.

In separate discussion at the Broadstreet, analysts explained that banking sector NPL will rise due to pressure from retail, manufacturing and oil and gas clients’ accounts.

Though, many banks maintained at their earnings calls with analysts the need not to be reckless with credit creations.

Balancing the need to operate a quality balance sheets and booking 65% of their deposits as loans to the real sector is at the core of banking strategy at the moment.

Speaking about earnings outlook for Q2, Samuel Adeyeye, analyst at PAC Capital said it’s obvious that lenders non-interest income line, especially fee and commission income, will be adversely affected.

“However, lenders will have impressive non-interest income as we expect the FX revaluation gain to offset the setback in NII line”, Adeyeye told MarketForces.

‘Economic, Regulatory Pressures to Suppress Banks Q2 Earnings by 8%’

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