•First Bank still leads bad debt profile
•Union Bank leads growth rate in interest income
By Peter Egwuatu
AS 12 banks record marginal growth of 0.02 percent to N920.4 billion from N920.2 billion in H1’17, stakeholders and operators in the capital market have frowned at the low interest income recorded by leading banks in the first half of 2018 (HI’18).
But the banks have, however, reduced their bad debts (impairment losses) by 26.1 percent to N263 billion in H1’18 from N356 billion in H1’17, a development investors applauded saying that it will improve profitability of the banks in the third quarter, Q3’18, which in turn would lead to increase in the returns to shareholders at the end of the year.
Analysts also were of the view that despite the pressure in the polity, Q3’18 corporate earnings are unlikely to be excessively negative in the light of the recovery in the broader economy, adding that bottom line numbers for some of the companies are set to improve.
Interest income review
A cursory review of the performance of banks quoted on the Nigerian Stock Exchange, NSE, in the review period showed that the 12 banks recorded N920.4 billion interest income in HI’18.
The tier-1 banks, which include: First Bank Holdings, GTBank, UBA, Access Bank and Zenith Bank, accounted for 65.3 percent of the interest income. Four of the tier-1 banks occupied the top five positions in terms of interest income in absolute value.
The top five banks in terms of interest income in absolute value include: Zenith Bank N153.961 billion; First Bank N149.640 billion, Ecobank Group N146.569 billion, UBA 111.076 billion and GTBank N101.368 billion.
In percentage growth rate, Union Bank, a tier-2 bank, led the chart, increasing by 14.1 percent to record N34.346 billion in H1’18 from N30.098 billion in H1’17. It was followed by Zenith Bank which surged by 10.8 percent to record N153.961 billion from N138.962 billion.
UBA came third as it rose by 9.6 percent to N111.076 billion, FCMB another tier- 2 bank came fourth on the chart , recording an increase of 8.5 percent to N35.269 billion from N 32.497 billion, while Wema Bank, a second tier bank rose by 7.2 percent to come fifth position , recording N9.089 billion from N8.480 billion.
Bad debts review
The 12 banks recorded a total of N263.006 billion bad debt in H1’18, a decline of -26.1 percent from N356.131billion in H1’17. The tier-1 banks which accounted significantly to the total bad debts, representing 66.7 percent, recorded N175.4 billion bad debts.
The top five banks’ bad debts in absolute terms include: First Bank N19.640 billion; Ecobank Group N41.127 billion; Diamond Bank N18.391 billion; Zenith Bank N9.720 billion and Wema Bank N8.745 billion.
In percentage decline in bad debt portfolio FCMB led the best performers on the chart declining by -26.5 percent to N7.333 billion from N9.972 billion, First Bank whose bad debts dropped by -8.8 percent to N149.640 billion from N164.085 billion came second, while. Diamond Bank dropped by -2.9 percent to N 18.391billion from N18.941 billion.
The Managing Director / CEO, APT Securities & Funds Limited, Mallam Garba Kurfi, said: “The implication of the reduction of impairment by 26 percent in H1 2018, shows the extent our banks have gone in cleaning their bad debts and also the likely less loan is given by the banks which affects the progress of the economy as we witnessed decline in Gross Domestic Products, GDP.
The less declared of impairment by the banks, the more the profits they will record and also the better for shareholders of the banks.
The marginal increase of the net interest the less banks lend to the economy and is not good for the economy especially when we realize that Nigeria is just a year from recovery from recession.
Generally, the performance of these banks showed that they concentrated more in Treasury Bills, TBs and FGN Bonds rather than lending which is the core business of banking.”
A Chartered Stockbroker/Managing Director, Sofunix Investment & Communications, Mr Sola Oni said: “Impairment loss indicates decline in the future economic benefits of an asset after charges for depreciation. Decline in impairment loss reflects managerial effectiveness.
For instance, goodwill must be tested annually to ascertain that its recorded value is higher than fair value otherwise, goodwill will be deemed impaired.
“Also shareholders benefit from reduction in impairment as it provides valuable information on how a company manages its goodwill. It also enables shareholders to evaluate quality of management’s decision making process and track records. Any write-off due to an impairment loss can adversely affect a company’s balance sheet and its financial ratios.
“Banks derive interest income from loans and deposits. The prevailing economic situation has made loans unattractive as banks are cautious at giving loans. This is to avert challenges of default.
Customers are also cautious in applying for loan. This scenario has made margin from interest income to shrink. Interest income is also a function of a bank’s sensitivity to asset and liability in the event of changes in interest rate.
“Many banks’ assets are in loans because loans have higher interest rates. This is expected because loans are riskier assets compared with marketable securities”.
The Managing Director and Chief Executive Officer of Solid -Rock Securities and Investment Plc, Mr. Patrick Ezeagu, said: “Government’s restructuring of its portfolio of Treasury Bills impacted negatively on interest income of banks that have stronghold in this asset class. But the good thing is that decline in interest income is also offset by corresponding reduction in interest expense. In this regime of marginal interest income, banks should de-risk their portfolios and focus more on loan growth oriented sectors.”
Reacting as well, Head of Research & Investment, FSL Securities Limited, Mr. Victor Chiazor, said: “A reduction on impairment charge directly improves the profitability of the banks which also increases the return to shareholders.
Given the marginal rise in net interest income, this suggests that the banks need to increase it’s loan book and not rely on high interest rates to grow interest income instead they should focus on putting systems in place to reduce its credit risk during loan periods.
As seen in the banks’ balance sheet for H1’18, most of them are not creating more loans and this will continue to hinder growth in the real sector of the economy.”
In their reaction, analysts at Cordros Capital said: “Despite the pressure in the polity, Q3’18 corporate earnings are unlikely to be excessively negative in light of the recovery in the broader economy, adding that bottom line numbers for some of the companies are set to improve.
Notwithstanding the distraction in the political climate, we are of the view that investing in stocks with consistent dividend payment profile, stable earnings, and stock market liquidity is clearly strategic.”
The spoke person for Independent Shareholders Association of Nigeria, PSAN, Mr. Moses Igbrude said: “A dropped in impairment loss by banks is a good news to the shareholders and is an indication that banks have started getting their loans booking right.
A drop of 26 percent impairment loss in H1’18 is also sign that banks’ managers have improved loans booking and recovery, it is good for the banking system and it implies that shareholders will benefit significantly if the trend continues till year end.
Persistent decline in the equities market
On the back of the persistent decline in the equities market and anticipation of release of third quarter 2018 (Q3’18) earnings reports by quoted companies, he said “We urged investors to adjust their portfolio to accommodate stocks with history of resilient revenue growth and consistent dividend payment. We also advise investors to seize opportunity presented by low prices of stocks to buy more, saying that the bearish outlook presents an opportunity for bargain hunting.”
The Chairman, Constance Shareholders Association of Nigeria, Alhaji Shehu Mallami Mikail said : “ It is good to hear that our banks reduced its bad debts during the period of review when compared to the same period in 2017. If they continue like this till the end of the year, it means the profits from banks this year will be higher than the previous year.
However, the banks should try to give loans that will help the manufacturing sector to grow. The loans to this sector should be less risky when you compared with those in the services.” sector.
They should make sure they undertake proper risk management in giving out loans no matter the sector involved.”