Deposit Money Banks (DMBs) profit increased by more than 60 percent in the last one year, mainly driven by increases in interest income.
Banking sector net interest income is the difference between the revenue that is generated from a bank’s assets and the expenses associated with paying out its liabilities.
Yahaya Shehu, a member of the Monetary Policy Committee (MPC) who stated this in his personal statement at the November 2017 meeting, also noted that banks’ return on equity (ROE) and return on assets (ROA) are showing an upward trend and are higher than comparator countries.
However, total credit to the economy decreased by a little over 3 percent; non-performing loans (NPLs) are rising and the capital adequacy ratio, while still above the regulatory threshold, is declining.
“Banking industry profitability improved significantly, although I am not under any illusion that the challenging macroeconomic environment could have adverse effect on non-performing loans (NPLs)”, said Joseph Nnanna, governor, financial system stability, Central Bank of Nigeria (CBN).
Reflecting banking system liquidity, Nnanna said the average inter-bank call rate, which opened at 12.00 per cent on October 3, 2017, closed at 5.38 per cent on November 16, 2017. The OBB rates opened at 10.41 per cent and closed lower at 6.02 per cent in the same period. However, the average inter-bank call and Open Buy Back (OBB) rates for the period stood at 10.94 and 10.15 per cent, respectively. Credit to the private sector fell by 0.24 per cent in October 2017, while net credit to government rose by 7.60percent.
“We think sector NPLs are close to their peak, and we expect higher oil prices will have direct implications on loan performance. We believe capital buffers will rise as profits improve”, Olamipo Ogunsanya, analyst at Renaissance Capital said in a note.
Despite a positive macro backdrop, RenCap believes 2018 will be a recovery story at best; earnings growth will be challenged by the declining yield environment, volatility in forex related gains, and limited scope for cost efficiencies.
“Tough economic decisions are likely to be delayed till after the 2019 general elections, but the political risks that come with a pre-election year render us cautious on the recovery ahead. We assess the evolution of non-interest revenue (NIR) over the past few years, and believe that the smaller banks such as SIBTC, Diamond and FCMB should see less volatility in NIR given the relatively higher contribution from stronger more sustainable income streams such as e-banking business and services”.