Top banks struggle to grow earnings, profitability

AVERSION for credit risk may have begun to take more serious toll on top banks in Nigeria, otherwise referred to as tier-1 banks.

Consequently, despite massive assets deployed in the course of the year, their third quarter 2018, Q3’18, financial results indicate diminishing returns with paltry 1.3percent growth in gross earnings as against average 18 percent recorded in the past three years both Year-on-Year and Quarter-on-Quarter. But analysts believe the development reflects the uncertainty in the business environment brought on by heightened political tension ahead of the 2019 general election.

The banks, which include: Zenith Bank Plc, Access Bank Plc, FBN Holdings Plc, United Bank for Africa, UBA Plc and Guaranty Trust Bank Plc, posted N2.003 trillion in gross earnings for the period, just 1.3 percent increase compared to N1.978 trillion recorded in the corresponding period in 2017. Also, their pre-tax profit inched up by just 4.5 percent to N532.27 billion from N509.25 billion in Q3’17. Average growth rate in profit in the past three years was 22 percent as at end 2017. According to financial market operators, the banks were not able to grow their risk asset (loans) during the period despite the shrinking yield in federal government securities, which had hitherto boosted their earnings.

Financial Vanguard analysis of primary market auctions of treasury bills (TBs) conducted by the Central Bank of Nigeria (CBN) showed that average yield on 91-Days and 182-Days TBs fell by 497 basis points (bpts) between September this year and September last year. While yield on 91-Days TBs fell by 259 bpts to 11 percent in September 2018 from 13.59 percent in September 2017, yield on 182-Days TBs fell by 734 bpts to 11 percent in September 2018 from 18.34 percent in September 2017. Operators opined that the banks would not record any major difference in their full year financials, but advised investors to take position on the stocks as the banks are well disposed to declare interim dividend payment. Meanwhile, the Tier-1 banks in some other performance indicators such as asset base and total deposits performed significantly better as they recorded total assets of N23.5 trillion in the review period, representing 14.3 percent increase from N20.521 trillion recorded in Q3’17. In the same manner, total deposits of the banks grew by 18.7 percent to N15.996 trillion from N13.472 trillion in Q3’17. These indicated availability of liquidity to drive increased credit outlay which could have created a better gross earnings. Commenting, Mr Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, said: “Tier-1 banks’ major customers are the blue chip companies that are interest rate sensitive, so they were not able to increase their yield on risk asset”. Earning by banks Financial Vanguard’s analysis of the results of the five banks indicated that Zenith Bank Plc took the leadership position, towering above others in nominal terms with regards to both the gross earnings and pre-tax profit declared during the period. Specifically, the bank recorded gross earnings of N474.61 billion, followed by FBN Holdings Plc, which recorded N441.45 billion. Access Bank placed third with N375.2 billion, while UBA Plc and GTBank Plc came in with N374.8 billion and N337.3 billion gross earnings respectively. UBA led others in terms of percentage growth rate in the gross earnings declared for the quarter. The bank’s gross earnings grew by 12.6 percent. GTBank followed with 8.8 percent gross earnings growth rate, while Access Bank and FBN Holdings gross earnings were up 2.8 percent and 0.58 percent respectively. However, Zenith Bank’s came in negative with gross earnings dropping 10.7 percent. Thus, though only UBA was able to edge up by double digit growth none of the tier-1 banks could meet the three-year average growth rate of 18 percent in gross earnings. Profit position by banks On growth in pre-tax profit Zenith Bank led in nominal and percentage terms. The bank’s pre-tax profit rose by 9.7 percent. GTBank grew by 9.5 percent, while UBA placed third with its profit inching up by one percent. On the flip side, FBN Holdings’ profit fell by 7.4 percent, while Access Bank dropped by 3.6 percent. Again, all the banks underperformed the three-year profitability average growth rate by wide margin. Total Assets by banks Analysis of the assets table shows that in absolute term, Zenith Bank led the chart recording N5.618 trillion, followed by First Bank with N5.618 trillion. Access Bank came third with N4.552 trillion followed by UBA with N4.507 trillion, while GTBank came fifth recording N3.433 trillion. In percentage term, Access Bank led the chart growing its assets by 28.6 percent, followed by UBA, which grew its assets by 19.5 percent. First Bank occupied third position, recording 10.6 percent growth, followed by Zenith Bank with 9.5 percent and GTBank came fifth recording 6.8 percent growth. Deposits position of banks Topping the Tier-1 banks’ deposit base chart in absolute term was First Bank recording N4.016 trillion, followed by UBA with N3.310 trillion. Zenith Bank occupied the third position on the chart recording N3.276 trillion, followed by Access Bank which posted N3.059 trillion while GTBank occupied the fifth position recording N2.335 trillion. Meanwhile, analysis of the total deposit by the Tier-1 banks in percentage term shows that Access Bank led the chart growing by 36.1 percent, followed by UBA recording 25 percent growth. GTBank came third on the chart growing by 18.5 percent. It was followed by First Bank which grew by 13.3 percent, while Zenith Bank came fifth growing by 7.0 percent. Why the earnings are down Johnson Chukwu of Cowry Asset Management speaking on the Q3’18 performance of the banks said: “If you look at their balance sheet, you will discover that most of them do not grow their risk asset. The tier-1 banks are quite conservative now than the tier-2 banks; they are not aggressively lending. “One of their major sources of income has declined. Last year, they were earning close to 20 percent from Treasury Bills, and because they are risk averse, they put a lot of money in federal government fixed income instruments; so, that boosted their revenue. Now yield on federal government securities has gone down to about 13 percent, that has affected their net interest income adversely. “They would have made it up for the drop in yield in FGN securities if they were aggressive in risk asset creation, but most of them are quite conservative when it coming to lending.” However, Charles Fakrogha, Chief Relationship Officer and stockbroker at Foresight Securities and Investment, described the performance for the period as impressive, that it shows that management of the banks are more efficient and effective. He said: “I was a bit negative, my expectation was not high, but when the results started coming, I was quite impressed looking at the economic environment they are operating. The third quarter results are okay. I will advise investors to take position in the banks.” Full year Outlook On the outlook for the full year, Johnson Chukwu said that the current growth trajectory would be maintained throughout the financial year but explained that despite the projected not-so-impressive full year performance, the stocks would not experience a sharp change in their prices as they are ‘defensive stocks’. “This means that you do not expect so much gain or losses in their share prices”, he said. Fakrogha shared the same sentiment, saying: “For me, I do not foresee any major change, all things being equal, in terms of their performance for the full year because historically, once you see the Q3, you can project that this is likely how the Q4 and full year will be. From what we have seen so far, it looks positive and I am expecting investors to take position in the banks. “However, you cannot rule out the impact of political and security uncertainty in the market, but if the government is ready to play their own part by trying to keep their words and containing insecurity, then I see the full year of these tier-1 banks coming in very positive.” He advised investors to be a bit patient with the management of the companies, saying that even if they are not able to pay as much dividend as expected, “they are succeeding because they are not actually declaring losses.”