Weak real sector performance casts doubts on banks’ growth, say operators

Operators have expressed concerns about the government’s inability to provide an enabling environment for the real sector, thereby avoiding the multiplier effect on banks’ Non-Performing Loans (NPLs), as well as their profitability.

The stockbrokers who spoke while reviewing the nine months’ financial performance of the five big banks with the acronym, FUGAZ: FBN Holdings, United Bank for Africa, GTCO, Access Bank and Zenith Bank, said should government fail to provide a favourable business environment that would boost performance in the real sector and sustain economic growth, the banks may find it difficult to expand their operations which would ultimately shrink their profits and returns on investment.

This is because the Central Bank of Nigeria’s (CBN) Loan-to-Deposit Ratio (LDR), introduced to improve lending to the real sector, has pulled a large chunk of money from the bank.

The operator argued that while the banks have given out a large chunk as loan facilities to the private sector, the fund may not be properly utilised due to the nation’s macroeconomic challenges occasioned by the failure on the part of the government to provide the right policies and create enabling environment that would impact positively on businesses in Nigeria.

For instance, the Head of Equity, Planet Capital, Dr Paul Uzum said the second half of this year has been quite challenging for many corporates in Nigeria, largely attributable to the rising inflation, foreign exchange shortage, insecurity, and slow level of economic growth.

“Many companies in the consumer goods sector that showed strong signs of recovery and massive growth in Q1 and Q2, recorded weak numbers in Q3. For instance, the likes of Guinness, NB, International Breweries, Cadbury, and industrial goods firms like Dangote Cement and Lafarge WAPCO.”

Although he admitted that these banks have remained resilient and achieved at least some marginal growth, he noted that many of the banks with USD loans in their balance sheet are having FX translation losses occasioned by the devaluation of the Naira.

“The FUGAZ Banks for example still recorded an average of 16 per cent growth in post-tax profit with FBNH (+124%), UBA (+11%), GT (+0.5%), Zenith (+8.6%) and Access (+12%); the trend for the tier 2 banks also showed growth across the banks. However, we noticed FX translation losses.

“Forex translation occurs because they have foreign operations and also invested in dollar-denominated assets like Eurobonds.

“Because of the huge leap in interest rates, most of the fixed income assets when measured at fair value will be reporting losses. The impact is huge across the banks, and it impairs the reserves of the banks,” he added.

Chief Executive Officer of Wyoming Capital and Partners, Tajudeen Olayinka said the performance of the FUGAZ banks has been relatively positive on average despite the persistent harsh operating environment.

According to him, this is an indication that the banks possess capacities to adjust to the variability of costs and cost pressures in the short run.

However, he pointed out that a situation where the banks would continuously re-price loans and advances in the midst of a difficult operating environment confronting large numbers of borrowers pose enormous challenges to their operations.

On the effect of the continuous loan reprising on banks, he said: “If inflation continues to trend upward, CBN might be tempted to continue to raise MPR, which means banks and other economic agents will continue to re-price their offerings, in order to recover the cost.

“It will get to a point where a high-interest rate will attract more liquidity to the system, and thus, bring the interest rate down on its own. So, repricing could cause the interest on bank loans and advances to trend upward or downward, depending on the state of the economy.

“However, when the interest rate is too high for existing borrowers to absorb into their cost structure, it exposes borrowers to risk of default. This is what banks have to manage, as it affects asset quality.”

He also argued that another consequence may imply that both existing and new borrowers would have to work around reducing borrowings from banks, which will affect banks’ interest income.

According to him, such instances will force banks to channel resultant liquidity to other profitable financial assets, forcing yields to trend downward in the financial markets.

A look at the nine months’ performance of FUGAZ Banks showed that FBN Holdings Plc posted a profit for the year-to-date to the tune of N91 billion, 123% higher compared to N40.7 billion achieved in the same period of 2021.

United Bank for Africa (UBA) reported a 12.3 per cent rise in Profit Before Tax to close at N138.5 billion compared to N123.4 billion recorded at the end of the third quarter of 2021, while profit after tax also rose significantly by 10.9 per cent to N116 billion up from N104.6 billion recorded in the corresponding period in 2021.

For Guaranty Trust Holding Plc (GTCO), the Group reported a profit before tax (PBT) of N169.7billion, representing an increase of 11.7 percent over N151.9billion recorded in the corresponding period ended September 2021.

The company also reported pre-tax profits of N49.5 billion compared to N37.8 billion reported in the corresponding period of 2021 representing a 30.9% increase year on year.

Also, Zenith Bank Plc results showed that the Group recorded a 13% year-on-year (YoY) increase in profit before tax, growing from N179.8 billion in Q3 2021 to N202.5 billion in Q3 2022. Its Profit after tax increased by nine per cent from N160.6 billion to N174.3 billion within the same period.