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Nigerian banks, bolstered by e-banking income, bet on swift economic recovery


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Nigerian banks, bolstered by e-banking income, bet on swift economic recovery

Nigeria's top banks have bet on a swift economic recovery, restructuring a large chunk of their loan books to provide corporate borrowers with more favorable terms as a pandemic-inspired e-banking boom boosts non-interest income.

Nigeria's GDP shrank 6.1% in the second quarter of 2020 after lockdown measures impacted the economy, while a plunging naira has stoked inflation. Yet banks appear relatively robust, with comfortable capital adequacy ratios and some lenders maintaining interim dividend payments despite the broader tumult.

The number of active bank accounts in the country has increased since the onset of the coronavirus pandemic, and e-banking has proved a boon for the nation's lenders.

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"If the economy continues to [rebound] into 2021, they will be able to maintain their performance," said Teslim Shitta-Bey, managing editor at financial information service Proshare Nigeria, noting that eight of Nigeria's 13 listed banks have reported higher earnings this year versus 2019.

"We're optimistic banks' core earnings and profitability will increase in 2021, especially among tier 1 banks. Some tier 2 banks will struggle."

Nevertheless, impairments have soared. Access Bank PLC's half-year impairments more than tripled to 16.5 billion naira, while Zenith Bank PLC's rose 74.2% to 23.9 billion naira and FBN Holdings PLC's swelled 38.6% to 30.7 billion naira.

"Impairments will probably increase further, but I'm optimistic because I doubt the overall pandemic impact will be as drastic as we feared in March," said Jerry Nnebue, an equities analyst at CardinalStone, an asset management firm in Nigeria's commercial capital, Lagos.

Among the banks that CardinalStone covers, lenders restructured an average of 21% of their loan books.

"It's not a blanket restructuring — borrowers have to pass certain criteria to show they're a viable company and otherwise would be able to service their loans if it wasn't for COVID-19," says Nnebue. "Banks are restructuring loans on the assumption of a quick economic recovery."

Oil and gas sector

More than a quarter of Access' 3.55 trillion naira of loans are to the oil and gas sector, which has been battered by lower energy prices, dwindling demand and higher naira-based costs due to the decline in the local currency.

Of Zenith's 2.8 trillion naira of loans, $3.0 billion — or 41.7% — are in dollars, with more than half its lending to oil and gas companies in the U.S. currency. The hydrocarbons sector also accounts for 83.3% of its restructured loans.

In its half-year earnings presentation, Access Bank warned of asset quality concerns, noting that waning economic activity had dampened credit demand and weakened borrowers' ability to repay. Access also highlights "elevated" credit risk from Nigeria's hydrocarbon sector.

Yet lending to the oil and gas industry increased this year, Shitta-Bey said.

"Banks are hoping there will be a V-shaped recovery and in such a recovery you tend to remember your friends who stood by you — if banks don't continue to support oil and gas companies now, they're likely to switch to another bank and never return," said Shitta-Bey.

"Banks want to retain their customers and are restructuring oil and gas loans, extending the tenor and reducing debt-servicing costs."

Some banks' half-year net interest income slumped year over year as falling interest rates hit earnings from investment securities. Access' fell 10%, FBN Holdings' fell 7.4% and Zenith's was near flat.

Zenith's non-interest income also grew 6% to 116.5 billion naira as higher trading and other operating income more than offset a decline in fees and commission income.

Digital banking swells non-interest income

FBN's non-interest income surged 46.8% to 80.1 billion naira, thanks to digital and mobile banking transaction volumes and value rising more than 20%, although e-banking income took a dwindling share of this revenue due to new regulations that cut fees by up to 50%. Zenith reported a similar performance, attributing a 24% increase in fees and commission income to an e-banking boom.

Financial inclusion in Nigeria — defined as the number of adults with accounts at a bank or mobile money provider — was lower than the average for the biggest sub-Saharan countries in 2017, figures from the World Bank show.

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"Nigeria's banking sector is coming from a low technological base," said Shitta-Bey. "We saw more people entering the banking system and transacting digitally, especially in rural communities. People found it more convenient to use their phone to bank and that's manifested in many of the banks' earnings."

Such trends are evident in data from the Nigerian Interbank Settlement System, which shows that Nigeria had 111.5 million active bank accounts in May 2020, up from 82.5 million in February. But such figures do not necessarily tell a clear story.

"Banks have been aggressive in reactivating dormant accounts, but it's tough to decipher because account maintenance fees were weak in Q2 due to low economic activity," said Nnebue.

"With lockdown measures, people had less money to save as the focus was consumption. Banks' ability to generate revenue from retail banking depends on broader economic activity rather than the number of active accounts."

Access's retail commissions rose 60% year over year to 29.3 billion naira, with debit and credit cards providing 42% of total retail banking revenue.

Banks' net interest margins vary. Access' fell 280 basis points year-on-year to 4.9% and FBN's eased 70 bps to 6.8%, while Zenith Bank's expanded 40 basis points to 9.0%.

Declining NIMs are a worry, said Nnebue, although banks benefit from lower funding costs due to recent adjustments to the savings deposit minimum rate.

"Nigerian banks have the capacity to sustain their recent performance into the second half of the year," Nnebue said.

"Their big worries are the low-yield environment, asset quality and unpredictable regulatory measures, which can inhibit earnings growth, along with a second wave of COVID-19."

As of Oct 21, US$1 was equivalent to 381.50 Nigerian naira.