Private sector lending seen rising as fixed income attraction fades

by | February 9, 2018 1:05 am

Bank lending to the private sector is forecast to improve, as government debt loses the yield appeal that lured lenders to tie up cash with government securities and shun private businesses in need of capital.
Improved private sector lending will prove a needed boost for Africa’s largest economy, notorious for high cost of capital that makes it tough for small businesses to operate, let alone expand and create jobs.
“Credit extension growth to the private sector by banks was almost non-existent last year because fixed income instruments were more attractive,” said Gregory Kronsten, head of fixed income research at Lagos-based investment bank, FBN Quest.
“However, given that yields have fallen by +/-300 basis points in the past six months, we see a gradual pick-up in lending to the private sector through this year,” Kronsten said in a February 8 note.
Following the collapse in government revenue brought on by lower oil earnings and reduced tax receipts, yields on government Treasury Bills (T-Bills) hovered around 21 and 23 per cent and government issuance ballooned as the FG sold short term securities with a view to raising money to fund budget deficits and mop up liquidity.
However, treasury yields have tumbled to as low as 15 percent within the past six months, as the government tries to rebalance its debt mix, manage ballooning domestic interest payments and fix its inverted yield curve by removing the high-yield distraction at the short end of the curve.
The average yield on treasury bills settled higher by 0.04 percent at 15.33 percent Thursday, as selling pressure prevailed on all the tenors, except the 3 month and 6 month tenors, which recorded respective drop in yields of 0.38 percent and 0.05 percent.
Commercial banks tied up cash in risk-free government treasury bills to share in the spoils of high returns, starving the private sector of affordable credit.
Thirteen banks (Zenith Bank, Access Bank, Diamond Bank, Fidelity Bank, First City Monument Bank, Guaranty Trust Bank, Stanbic IBTC Holdings, United Bank for Africa, Union Bank, Sterling Bank, Unity Bank, FBNH and Wema Bank) on a combined basis, raked in some N562.67 billion as interest income from T-Bills in the first nine months of 2017, representing a 53.55 per cent increase from last year’s figure of N366.42 billion, according to data compiled by BusinessDay.
“Government lending has crowded out the private sector for a while now, as it is only logical for banks sidestep risky private lending in favour of high yielding, tax-free and risk-free government debt,” said Muda Yusuf, director general of trade advocacy group, the Lagos Chamber of Commerce and Industry.
“As yields drop, however, then they can begin to look at lending more to the private sector which will reduce cost of fund, stimulate domestic investment and create jobs,” Yusuf said by phone.
Commercial bank lending rate to the private sector is anywhere between 20 to 30 percent, depending on the risk involved.
The rate is one of the highest on the continent and a disincentive for small businesses- that are adding to their woes by not keeping reliable financial records.
The Central bank has kept benchmark interest rates at 14 percent since July 2016, trying to ward off high inflation and boost an economy that marginally exited recession last year.
Nigerian banks on average delivered flat to slightly negative loan growth in the 9 months 2017 period.
A total of N15 trillion in commercial bank credit was allocated to the private sector as at the fourth quarter of 2017, according to a banking report published Wednesday by state-funded data agency, the National Bureau of Statistics (NBS).
“Given the improving macroeconomic environment and declining yield environment, all the banks in our coverage universe are guiding for stronger credit growth in FY18. Our base case for FY18E is 10% loan growth for the sector,” said Renaissance Capital analysts Olamipo Ogunsanya and Ilan Stermer, in a February 5 report.
“The banks see lending opportunities in sectors such as manufacturing, general commerce and upstream oil and gas (for international oil companies). The appetite to create new foreign currency assets remains relatively weak, and we expect loan growth will largely be driven by the local currency book.”
Capital constraints may however present some challenges to growing loan books for the smaller banks.