Nigerian banks which have sustained juicy Net Interest Margins (NIMs) due to high interest rates and cheap funding may have to review their business model next year, to sustain profitability, as economists forecast fall in interest rates.
Analysts say Nigerian bond yields are set to decline further next year, in spite of a pickup in inflation.
The National Bureau of Statistics (NBS) announced on Monday that inflation rose to 12.3 percent year on year(y/y) in November, from 11.7 percent (y/y) in October and 11.3 percent y/y in September.
Despite the higher November inflation figure, bond yields barely moved during Monday’s trading session, indicating that the markets are not particularly concerned about the Consumer Price Index (CPI) outlook and that it still anticipates a positive trend on a multi-month basis, say analysts. “The likely decline in net interest margins in 2013 -as fixed income yields compress further- should not necessarily negatively impact the profitability of Nigerian banks if they start focusing more on core financial intermediation,” said Samir Gadio, an emerging markets strategist at Standard Bank London, in an email response to questions.
“Indeed, there is a massive untapped retail and non-Tier I segment of the market which is likely to generate attractive returns, assuming the banks are ready to move (even moderately) to the next risk layer.”
Nigerian banks are generally averse to real sector lending. Nigerian banks aggregate credit to the private sector has grown by a meager 2.99 percent year to date, according to Central Bank of Nigeria (CBN) data.
The banks have however declared cumulative after tax profits of N362.2billion in the nine months to September 2012, an 88.2 percent rise from the same period last year.
“If bond yields start dropping to single digits for a sustained period, then banks will be forced to explore other areas and that will be back to traditional lending to the real economy, as well as consumer financing/mortgages,” Kayode Akindele, Partner at 46 Parallel, a Lagos based investment firm said.
First Bank of Nigeria (Nigeria’s biggest bank by assets) boosted its loan book by an annualised 30 percent in the first nine months of 2012, reflecting a strategic shift to move up the risk curve.
Nigeria’s Gross Domestic Product is projected to expand by 6.2 percent from 2011 to 2014 and GDP per capita is estimated at $1,600 in 2012 according to the International Monetary Fund (IMF).
As bank executives have benefited from higher net interest rates (NIM), they’ve also spent the past three years firing workers to keep earnings expanding.
Many Nigerian banks have announced job cuts as they target staff compensation, usually their largest non-interest expense.
Analysts say there will also be increased competition to lend to high- quality corporate customers and financing of large infrastructure and Government backed projects,
“It’s hard to imagine the NIM environment getting much more favourable than this in the medium term,” said an industry source.
Nigeria’s banking sector has been largely transformed, after the CBN intervention, and the subsequent reform has reshaped the industry.
According to rating firm Standard and Poor’s (S&P),while the Top-tier banks (First Bank, Zenith, GTB, UBA and Access) are largely unaffected by the new banking landscape in the short term, their interest margins or corporate relationships could come under pressure in the long term.