CBN’s T-Bill slowdown may hurt banks’ profits, says Fitch
An international credit rating agency, Fitch Ratings, has predicted that the Central Bank of Nigeria’s Treasury Bills slowdown may impact negatively on banks’ profits in 2018.
The International agency on Thursday said that Guaranty Trust Bank Plc, Zenith Bank Plc, Access Bank Plc, United Bank for Africa Plc, among others, might find it more difficult to sustain profitability given the decline in net Treasury bill issuance in the first quarter of 2018 issuance programme of the Central Bank of Nigeria.
Coupon rates on T-bills and bonds were reduced as the Federal Government looks to increase its financing from external sources and longer-dated domestic issuances.
The slowdown in T-bill issuance marks a change of strategy as the Federal Government looks to increase its financing from external sources and longer-dated domestic issuances.
In a statement on Thursday, Fitch said, “We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018.
The CBN’s latest issuance schedule shows N1.1tn of rollovers in first quarter of 2018 against N1.3tn of maturing bills.
In 2017, rollovers fully covered maturing bills.
“Performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains and rising loan impairment charges, but the largest banks are best placed to withstand these challenges,” Fitch said.
Fitch said the record T-bill issuance in 2017 helped support the CBN’s strategy to maintain stability at the foreign exchange market as global oil prices continued to rally.
The report said, “High yields on T-bills issued in 2017 (around 13per cent-14per cent on 90-day T-bills) attracted investors and helped to support the naira.
“An increase in oil export earnings and the introduction in April 2017 of the Nigerian Autonomous Foreign Exchange Rate Fixing mechanism, commonly referred to as the Investors and Exporters’ FX Window (I & E FX), also helped naira stabilisation during the second half of 2017.
“Nigerian banks are highly reliant on net interest income for profitability and T-bills proved to be an important source of profits in 2017.”
“Interest on securities represented 30 per cent of total gross interest earned in nine months of 2017, averaged across Nigerian banks rated by Fitch (2016: 23 per cent),” the report by Fitch explained.
Fitch said as at nine-month ended September 2017, the Federal Government’s securities including T-bills represented more than 15 per cent of the banks’ total assets as new lending fell, reflecting weak credit demand, tighter underwriting standards and banks’ reluctance to extend new loans as they focused on extensive restructuring of troubled oil-related and other portfolios.
The report further said, “Even the country’s largest banks cut back on new lending, with Guaranty Trust Bank’s stock of outstanding loans falling 10 per cent during nine months of 2017, FBN Holdings’ by 4.6 per cent, Zenith Bank’s by 3.7 per cent and Access’s by 1.1 per cent.
“United Bank for Africa’s loan book grew 5.6 per cent, but this is likely to have been driven by non-Nigerian lending as the bank operates in 22 other African countries.”
Fitch noted that GTBank has one of the highest return on average equity (ROAE) followed by Zenith Bank and Access Bank as at nine months ended September 30, 2017.
The report revealed that banks with four to six per cent ROAE might struggle to remain in profitability this year.
“Operating returns are still strong at GTBank (9M17 (37 per cent ROAE), Zenith (28per cent), UBA (22per cent) and Access (20per cent), while FBNH’s operating ROAE is lower (12per cent) but improving.
“However, some second-tier banks with nine months of 2017 operating ROAE of four per cent to six per cent may struggle to remain profitable in 2018,” the report added.