On Nigeria’s economic scene today, just a few sectors are smiling, while most are frowning, even moaning. Among those with smiles on their faces today are the banks. They are smiling to their vaults, and their operating results show why.
The banks are among the few beneficiaries of the elevated costs in the economy and financial sector, specifically, arising from the government’s economic reforms. So, while interest rates have risen and the local currency has depreciated, thereby raising its cost relative to other currencies, these have turned out to the banks’ advantage.
Contrary to the experience in the real sector, the banks are benefitting from several items as their books show, including interest income and currency depreciation that gives them uncommon gains through asset revaluation. The elevation of interest rates by the Central Bank of Nigeria in its rolling fight against inflation has opened an array of windows for the banks to earn cool income. There is also the banks’ ability to manage their costs, which is helping them to minimise the impact of the current economy-wide rise in costs, according to Cordros Securities.
On Monday, Cordros presented analyses of the uncommon gains in the 9-month results of the nation’s leading banks commonly known by the acronym, FUGAZ- First Bank, UBA, GTB, Access Bank and Zenith Bank. These Tier-1 lenders churned out the sterling results for the first nine months of the year recently. It was quite a good presentation and one that should give some comfort to banks’ shareholders as the financial year draws to a close. After all, people invest in companies in the hope that such enterprises will make profits that will translate into good dividend payout and other forms of compensation.
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CBN’s tight monetary policy (not just interest rate policy) has made credit in the system both expensive (higher interest) and scarce (through its narrow monetary policy corridors). Thus, by making the commodity (credit) both more expensive and scarcer the central bank has allowed the banks to charge interest rates much higher than the current MPR of 27.25 per cent.
It is not certain now what the CBN will do next, given that inflation inched up in October to 33.88 per cent. However, what the central bank seems to be taking away from the banks by curbing their ability to make credit, they through their ingenious investment strategies can make up through higher returns.
I have spoken with some business people who say their banks now charge interest rates much higher than 35 per cent per annum for credit facilities. That’s what analysts call the maximum lending rate that banks charge customers they consider riskier than say the blue chips. They also said that banks are writing to their customers, informing them that interest rates on old credit facilities have been revalued in line with the current realities. For such enterprises, the cost of funds has risen.
The result of these is that banks are experiencing explosive increases in their interest incomes, that is the income they make from lending money to borrowers. Access Bank led in this regard, with its 9-month interest income rising by 128.7 per cent year-on-year to N2.40 trillion, making it the largest result across the sector, Cordros captured this in a note to its clients on Monday.
“The stellar growth in the group’s core income was supported by the prevailing interest rate environment and the rise in the group’s earning assets (+69.4% YTD to NGN29.34 trillion),” the Securities firm said. Cordros said a similar thing about GTCO, where the nine-month income crossed the one trillion naira mark.
“The performance was driven by the strong growth across the group’s core and non-core income lines, reflective of the high interest rate environment and foreign exchange gains,” Cordros said.
Banks are savvy institutions and in the current high-interest environment, they are able to deploy their funds to make maximum returns. One of the opportunities they are exploiting is the high yields that the federal government is offering on its securities, especially the short-term instruments, where returns are sometimes as high as 20 per cent -26 per cent.
The above does not of course overlook or underrate the fact that the cost of funding is also rising for the banks. Yes, as the banks are raising their lending rates, so too are depositors asking for higher returns on their funds. But in the banking industry, everyone knows that the gap between a bank’s deposit rates and lending rates is like going from the east to the west. So, invariably, the critical indicator here, the Net Interest Income (difference between interest income and interest cost) still favours the lenders.
Even so, the banks are also subject to other operating costs that Nigerian businesses face in the current milieu. Energy costs have risen for everyone in Nigeria, including the banks. For them, this has become a critical cost element. They need to power their branches to keep the operations going.
Yet, the cost experience in the banking sector is far from what the real sector is facing. In manufacturing, agriculture, and even in the telecoms, things are really tight for many operators as rising costs squeeze out profit margins. Some have reported outright losses the causes of which are traceable to exchange rate-induced cost increases.
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