Interest Rate Trend Key to Banks Performance in 2022– Analysts
Following a relative downturn in average interest income and income from investment in securities recorded by Nigerian banks, analysts have projected that possible adjustments in asset yield would determine lenders’ performance in the financial year 2022.
Nigerian banks have been earning low from interest related sources of income while low yield environment in the fixed income space which used to be their safe haven has significantly nosedived after the apex bank placed a ban on certain individuals and non-bank corporate to participate in the OMO bills market.
Due to the low-interest rate environment engineered by the Central Bank of Nigeria (CBN) after it halted selling OMO bills to individuals and non-bank corporates in August 2019, returns from interest yielding assets have pulled back.
In a report, CardinalStone said yield dynamics is critical to Nigerian banks performance in the financial year 2022. The investment firm analysts led by Phillip Anegbe, Ngozi Odum and Jerry Nnebue hint that a 100 basis points shift in asset yields to drive a 16.9% growth in interest income.
Consequent to the low-interest rate environment, corporates adjusted by replacing expensive sources of funds with commercial papers issuance, and more refinance strategies have been deployed by bellwethers that used to court commercial banks for credit facilities.
Nigerian banks perform better in a high-interest rate environment, where they earn from both lending and in the fixed income market. With competition, an onslaught attack on earnings sources by Fintech companies, and a low-interest market, some Nigerian lenders were forced to rethink their revenues model.
Lower earnings from investment in securities and CBN 65% loan to deposit ratio have weighted on performance, especially the tier-2 lenders and other local banks that are struggling to breathe.
No doubt, low-interest yields have impacted their revenue generations from lending and financial market placements but their separate financial statements say otherwise in figure – big banks still maintain large profit declarations with few exceptions.
However, analysts believe that a reversal of the current interest rate trend is expected to impact the performance of banks with expensive customers’ deposits base Across the industry, the average interest income reported by Nigerian banks significantly dropped, though funds payable to funds providers has also declined in compensation of the loss of earnings from interest yielding assets.
Similarly, average funding costs in the banking sector has been reduced. Local banks earnings were supported by non-interest revenue but a decision by the apex bank to reduce charges on transactions has given birth to yet another downside risk.
“We expect changes in yield dynamics to be a critical driver of banks’ earnings in 2022, given that net interest income accounts for about 60.0% of banks’ operating income, CardinalStone said in a report.
The firm said its broad expectation is for yields to stay flat-to-falling in the first quarter of the year and rise gradually thereafter, with a base case shift of between +100 and +200 basis points from current levels by year-end.
In line with the stronger correlation between changes in interest income and asset yields versus the less emphatic relationship between changes in interest income and interest-earning assets, analysts hint about their expectation of a 100 basis points shift in asset yields to drive a 16.9% growth in interest income.
“Conversely, assuming asset yields stay flat, banks’ interest income would only grow at the average interest-earning assets growth rate”. Furthermore, CardinalStone analysts also assess that the cost of funds impact of a rise in yield would be more noticeable for banks belaboured by expensive deposits.
Nigerian banks with expensive deposits, according to CardinalStone include Access Bank, Fidelity, FCMB and Stanbic IBTC, which have term deposits in excess of 25.0% of total deposits.
This is way ahead of 18.0% for the rest of the investment banking firm’s coverage. However, analysts said the sector deposit mix may be influenced by the degree of funding needs across banks and the ongoing tilt to retail emphasis in the current year.
Aided by the expected boost in money supply on pre-electioneering activities, the latter should cascade to improvements in current account, savings account (CASA) ratios in the financial year 2022, analysts added. #Interest Rate Trend Key to Banks Performance in 2022– Analysts
