- AMCON Levy Worsened bank earnings
By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-Global rating agency, Fitch Ratings on Wednesday gave Nigerian banks pass mark despite the twin hurdles of tight monetary policy actions and new banking rules, Fitch says in a new special report.
“This is mostly supported by continuing robust economic growth. Nevertheless, we expect bank performance and growth to moderate over the next 18 months due to Central Bank of Nigeria actions aimed at protecting the economy and the banking system,” says Mahin Dissanayake, Director in Fitch’s EMEA Financial Institutions team.
The report says the Central Bank of Nigeria’s (CBN’s) stance also shifted towards protecting the consumer through its revised rules on banking charges introduced in 2013. Fitch says all these moves, however, led to weaker profitability and stemmed credit growth in half-year 2014 – a trend that is likely to continue into 2015.
According to the report, all Fitch-rated Nigerian banks were profitable in 2013 and half-year 2014; but saw performance slip. ‘’There were a few outliers and these were typically the smaller banks, which outperformed the sector,’’ the report said.
Fitch says earnings pressure was exacerbated by high operating costs at most banks due to a higher Asset Management Corporation of Nigeria (AMCON) levy and network expansion strategies.
The global rating agency says Nigerian banks are now seeing some asset quality deterioration with rising absolute Non Performing Loans (NPLs), reflecting fast loan growth since 2011. ‘’Most banks’ NPL ratios remain below the five percent (5%) prescribed by the CBN but Fitch views this as unsustainable in the long-run. Very high loan concentrations by borrower and sector expose banks, particularly the smaller banks, to significant event risk,’’ the report added.
The Fitch report affirmed that banks are also seeing moderate liquidity pressure with rising loans/deposit ratios. ‘’In response, the banks’ large customer deposit bases are continuing to expand on strong GDP growth and increasing banking penetration,’’ it said.
It further affirmed that the focus is on raising low-cost retail deposits to strengthen funding profiles, particularly following the cash reserve requirement hikes on public sector deposits.
According to Fitch, several banks have successfully tapped the euro bond market to raise longer-term USD funding to meet the strong demand for USD loans from major corporates, ‘’although it exposes the banks to FX-related risks,’’ Fitch said.
‘’We expect bank capitalisation to come under pressure due to Basel II implementation in 2014 and proposed new regulatory capital computation rules. As a result, Fitch believes regulatory total capital adequacy ratios could fall between 200bps-300bps this year. Most Fitch-rated banks report Fitch core capital (FCC) and Basel I regulatory capital ratios in excess of 20 percent which is considered a comfortable level given the risks inherent in Nigeria. A sharp decline in capitalisation could be negative for bank ratings,’’ the global rating agency affirmed.
It also reported that sovereign support drives most Nigerian banks’ Issuer Default Ratings (IDRs).
Fitch noted that out of the nine (9) Nigerian banks it rated on the international scale, six (6) have Long-Term IDRs driven by potential state support. ‘’They are First Bank of Nigeria, United Bank for Africa, Diamond Bank, Union Bank, Fidelity Bank and First City Monument Bank,’’ it said.
The rating agency said while the willingness of the Nigerian authorities to support domestic banks continues to be high – as demonstrated during and after the 2009 banking crisis – its ability is limited by the sovereign rating of ‘BB-‘.
On the other hand, Fitch said three (3) banks, Zenith Bank, Guaranty Trust bank and Access Bank have IDRs driven by their intrinsic strengths as defined by the Viability Rating (VR). ‘’All Nigerian banks have VRs in the ‘b’ range, mainly due to the high influence of the operating environment on their ratings. We believe the domestic operating environment can be challenging and sometimes volatile, therefore effectively capping the Nigerian banks’ VRs,’’ Fitch said.
The global rating agency said other factors constraining VRs include weak governance structures, developing company profiles (particularly for the smaller banks) and recovering financial metrics. Zenith Bank and Guaranty Trust Bank have the highest VRs of ‘b+’ due to their ability to perform well through the cycle.
