Low yield securities, uncertainties depress banks’ earnings in 2018
Although the Nigerian economy began the recovery process from its worst recession in over 25 years since 2017, but the banking industry recorded marginal improvement in the 2018 financial year.
In 2017, most banks were preoccupied with reducing loan assets and increasing the hold on treasury bills. This, helped improve the amount of liquid assets in 2018, and also improved their loan to deposit ratio, as most banks tried to clean up their balance sheet.But the current policy response to macro-economic dynamics has also forced banks to resort to replenishment strategies – locking into short-term maturity, especially risk-free instruments.
This is largely reflected in their cash flow statements, showing a relatively improved pool of marketable asset; which reduces the chances of risk mismatch.However, most of their income was concentrated on public securities, which eventually were adversely affected by insecurity in many parts of the country.Also, lower yields in the fixed income space in 2018 compared to 2017, kept interest income from placements lower for banks.
Consequently, the five big banks – Zenith, Guaranty Trust Bank (GTB), FBN Holdings, United Bank for Africa, and Access Bank, are currently trading at a value described by operators as very low compared to their fundamentals and the appreciable profits posted in their full year results.For instance, N720 billion profits posted by banks in the 2018 financial year was not enough to woo investors to the sector, as the pricing of their stocks fell below fair value.
In 2017, when the results of the five banks hit the market, with N606.1 billion full-year profit, which was lower than the 2018 performance, banking stocks, driven by the tier-one banks, offered the best return to investors in the equity market.
The banking sector of the NSE, which was rated second best bourse in Africa, and 11th best in the world in 2017, gave equity investors a 73.3 per cent return on investment in one year.As at the first quarter (Q1) 2018, the banking sector was already on a positive trend due to the high demand for the stocks in 2017.
Now, it is a different scenario when compared to the current performance where the sector is still trading on a negative territory long into Q2.
Reviewing the banks’ performance, the five banks recorded a total of N2.63 trillion as gross earnings for the 2018 financial year, lower than the N2.67 trillion achieved same period in 2017.But the Head of Research, FSL Securities, Victor Chiazor, defended that the banking sector fared relatively well in 2018, despite the relatively slightly lower gross earnings posted by most of the banks in the period.
According to him, “Lower yields in the fixed income space in 2018 compared to yields in 2017 kept interest income from placements lower for the banks while foreign exchange (forex) trading income was largely mute owing to the stability in forex market during the year. “However improved operating efficiency and cost management helped most of the banks report fairly higher profit for the year.”
A breakdown of these banks’ performance in gross earnings for 2018 showed that Zenith Bank led the pack with gross earnings of N630 billion. FBN Holdings took a distant second with N583 billion, while Access Bank was third with N528 billion. UBA came fourth with N464 billion, and Guaranty Trust Bank rounds up the top 5 with N434 billion in earnings.
By his assessment, Managing Director, Highcap Securities, Imafidon Adonri, said the aggregate earnings declined due to the uncertainties that trailed build up to the general elections.Besides, he said pervasive insecurity nationwide and poor business environment also affected banks’ top line adversely. “The banking sector performed well in 2018. The leaders – Zenith Bank and GTBank improved on their dividend payment. However, two weak banks, Diamond and Skye were rescued from outright failure.”
He continued: “Apart from these two failed banks and Union Bank of Nigeria, others paid dividend. Generally, the banking sector was healthy and contributed immensely to financial stability. “However, most of their income was concentrated on public securities. Insecurity in several parts of the country adversely affected them. As in the past, banks continued to dominate the economic landscape in 2018,” he added.
Similarly, cumulative pre-tax profit among the top five banks was N720 billion in 2018, higher than the N606.1 billion achieved in 2017. A further breakdown put Zenith Bank at the top with N231 billion, GTB N215 billion, UBA N106.7 billion, Access Bank N103 billion, and FBN Holdings with N65.2 billion followed respectively.
For post-tax, the top five banks posted a total of N610 billion for the 2018 financial year. Again, Zenith Bank led the pack with N193 billion; GTB with N184 billion; Access Bank N94.9 billion; UBA N78.6 billion, and FBN Holdings N59.7 billion.
Given the overall scenario, a stockbroker with Delloit Securities Limited, Tunde Oyediran, said the performance of many banks was not that encouraging in 2018, which is a reflection of the state of the economy.
“This showed in their results. Their profit margin was not high as usual. The cheap Treasury Bills investment they engage in is no longer yielding high returns. They need to go back to their conventional business of lending and other ancillary businesses that can improve their bottom-line greatly. Shareholders are not interested in hearing stories, they need to perform and declare good dividend.”