How bad debts squeeze banks’ profits

As banks set to release their nine-month financials, findings have shown that although they recorded an increase in earnings for the first half of this year, their profits were affected by a variety of fac­tors.
The various results released by the banks showed that 15 of them recorded gross earn­ings of N1.53 trillion during the first six months of the year.
The banks include First Bank of Nigeria Limited, Fi­delity Bank, Access Bank Plc, Guaranty Trust Bank Plc, Eco­bank Transnational Incorpo­rated, Diamond Bank Plc and Skye Bank Plc.
Others are First City Monu­ment Bank, United Bank for Africa Plc, Union Bank Plc, Wema Bank Plc, Zenith Bank Plc, Sterling Bank Plc, Stanbic IBTC Bank and Unity Bank.
The figure is N111 billion or 8.3 per cent higher than the ap­proximately N1.42 trillion the 15 banks made during the first six months of 2013.
According to their 2014 half-year results, ETI made the highest gross earnings, with N226.2 billion, followed by Zenith Bank, First Bank, UBA and GTB, which recorded N184 billion, N173.3 billion, N138.3 billion and N132.9 billion, respectively.
Others are Access Bank, N118 billion; Diamond Bank, N98 billion; Skye Bank, N63.8 billion; Fidelity Bank, N63.2 billion; Stanbic IBTC Bank, N61.5 billion; Union Bank, N49.6 billion and Ster­ling Bank, N48.6 billion.
The dip in profit resulted from Non-Performing Loans (NPL) and the fact that larger chunk of the gross earnings made this year went into in­vestments and interest, loan loss, personal and other oper­ating expenses.
Analysis of the results show that Access Bank’s total loans and advances grew by 17.1 per cent from N810.8 billion re­corded in June 2013 to N949.2 billion in June 2014.
The bank provided for N3.5 billion impairment charge for the quarter. An impaired asset is a condition in which an as­set’s market value falls below its carrying amount and is not expected to recover.
Skye Bank, on its part, ex­panded its loan portfolio by 5 per cent and received a hard knock on its performance by a 100 per cent loan loss provi­sion against bad debts. Loan loss is an expense set aside as an allowance for bad loans arising from customer de­faults.
Available records from First Bank of Nigeria Holdings show that due to its policy of early recognition of impair­ment charges, net impairment rose 60.5 per cent from N9.8 billion in 2012 to N15.7 billion in 2013. The group recorded non-performing loan ratio of 3.6 per cent compared with 3.8 per cent as at June 30, 2013.
One of the key drags on Guaranty Trust Bank’s half-year 2014 result was affected by a N5.1 billion higher-than-expected impairment charges for the quarter. This amount, which represented a 50 per cent provision for NPL, was largely driven by one asset – Lister Flour Mills – implying that it will not be recovered in full.
Recall that in an effort to clean up banks’ balance sheets smeared by NPL that were discovered in 2009, the Assets Management Corporation of Nigeria (AMCON) purchased a total of N4.2 trillion Eligible Bank Assets (EBA) at a cost of N1.7 trillion.
The Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Lagos branch, Mr. Abolade Agboola, recently argued that banks needed to make more profits because they had been making huge investments.
Shedding more light on this, he said, “the returns on investment (RoI) of banks is what we are looking at, not whether it’s in two, three or four billions. I think that is the challenge we don’t face. Yes, when you see banks declaring billions in profits, you need to look at the assets employed and the people engaged, among other things, to gener­ate this income.
“I don’t think the banks are doing fantastically too good. In fact, they need to do better because a lot of people invest­ed in the banks and they are expecting returns.”
In his opinion, the Chief Executive Officer of Finan­cial Derivatives Limited, Mr. Bismarck Rewane, noted that banks’ profits had gone down between last year and the first half of 2014.
While linking the develop­ment to a number of regulato­ry headwinds and the state of the economy, Rewane predict­ed that the lower profit margin trend might also continue for the banks in the third quarter of this year and probably beyond.
Rewane said, “industry­wide, the banks suffered from shrinking profit margins in the 2013 financial year and early 2014. This was because in the second quarter of 2013, the Central Bank of Nigeria (CBN) directed the banks to lower their fees and commis­sions to mitigate the bank-cus­tomer conflict (charges to the customers for current-account transactions) and consequently reduce customers’ burden.
“The direction was the first step in the gradual phase-out of the banks’ Commission-on- Turnover (CoT). This gradual phase-out will conclude in 2016 when customers’ ac­counts will no longer be deb­ited for transactions on current accounts. In the first quarter of 2014, the CBN increased the Cash Reserve Ratio (CRR) on public sector funds from 50 per cent to 75 per cent.”
The economist listed two major regulatory headwinds that might further affect the banks’ results in the coming years if the lenders failed to pass the cost to customers.
These are increase in banks’ capital base from 15 to 16 per cent for those with internation­al operations and increase in their liquid assets holding from 30 to 35 per cent.
Rewane, however, posited that the future is very bright for the banks because of a number of prospects
He said, “the banking sec­tor has the potential to ben­efit from Nigeria’s strong eco­nomic growth (forecast GDP growth for 2014 is 7.27 per cent). The non-oil sectors are now among the main drivers of the country’s GDP growth. Nigeria, with a population of 170 million, has already come under the focus of global in­vestors owing to its growing sectors, including power, in­frastructure, agriculture, solid mineral, retailing and services.
“The investments will add to the economic growth and lead to a significant demand for banking services. Invest­ments flowing into sectors such as road, rail and aviation infrastructure have already triggered a huge demand in the banking sector.

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