Experts sceptical of banks growth against unsustained economic environment
Experts have expressed fear on the bubble that may arise in the banking sector, should government fail to provide a favourable business environment that would boost performance in the real sector and sustain economic growth.
This is because the decision by the Central Bank of Nigeria (CBN) to increase banks Loan-to-Deposit Ratio (LDR) to 65 percent last year, to improve lending to the real sector has pulled a large chunk of money from the bank.
Consequently, they argued that the government’s inability to provide an enabling environment that would boost operations of companies under the real sector and improve their profits would ultimately shore up bank’s Non-Performing Loans (NPLs), and erode their profitability.
Therefore, they urged the government to implement the right policies and create an enabling environment that would sustain the improved performance recorded in the banking sector in the current financial year and generate a bumper harvest for shareholders.
Moreso, the apex bank recently released a circular restricting local non-bank corporate and retail investors from participating in the OMO market.
“The immediate effect of the OMO restriction was a sharp decline in fixed income yields firmly into single-digit territory amidst a reduced supply of investible naira assets.
This presents a positive case for equities as market selloffs in recent years have provided an opportunity for dividend yield investment strategy.
A cursory look at the performance of the banks in the current financial year revealed that the ‘big five’ banks in Nigeria; First Bank, UBA, GTBank, Access Bank and Zenith Bank, under the nickname FUGAZ, generated a profit of N521.64 billion in their results for the nine months ended September 30, 2019, against N480.4 billion they achieved in the corresponding period in 2018.
An analysis of the numbers showed that Zenith Bank Plc led with the highest profitability and total assets, and ended the nine months with a profit after tax (PAT) of N150.7 billion, compared with N144.2 billion posted year earlier.
GTBank followed closely with a PAT of N146.9 billion, up from N142.2 billion.
UBA posted PAT of N81.6 billion, which is 32.2 per cent above the N61.7 billion it made in the corresponding period of 2018. FBN Holdings Plc ended the nine months with N51.74 billion, compared with N44.8 billion in 2018.
Access Bank Plc also reported a significantly improved performance for the nine months, reflecting the positive impact of its merger with former Diamond Bank Plc.
The bank posted a growth of 44 per cent in profit after tax (PAT) to N90.7 billion in 2019, up from N62.9 billion in the corresponding period of 2018.
The Chief Research Officer of Investdata Consulting, Ambrose Omodion, admitted that the banks have performed well in the current financial year.
He however expressed fear on the state of the banks, if current growth in the economy is not sustained after dividend payment, even with banks’ recapitalisation that is in the pipeline.
“My fear is that after dividend payment and the economy does not improve, the banks may run into problems. This is because banks have borrowed a lot to the private sector.
“If the private sector did not excel in their businesses to pay up, many banks’ NPLs will increase, and if this happens, even with the forthcoming recapitalisation, many investors may not patronise the banks in the exercise unless they cushion the effect of the NPLs.”
The President of Ibadan Zone Shareholders Association said the best way to maintain the tempo is for the government to continue creating an enabling environment for companies to thrive so that loan facilities from banks will be well utilised.
“Banks board expenses should be monitored as well so that the bottom line could be robust when the overhead expenses are reduced. CBN should also fill the purse of the financial institutions and roll out policies that will assist in their operations.”
“The banking sector is a major wheel that is driving our market, and that is why there is heavy trading on it on a regular basis. This, coupled with high dividend yield of about 10-12 per cent return on investment attests to that fact.
“The expectation of investors is that with the better performances from Q1 to Q3, everyone believes that the final result will complement this. Investors are looking for better returns on their investments.
“With the recent low-income rate on another investment opportunity like treasury bill, fixed acct, FGN bond the best opportunity is in the capital market.
“Dividend yield of 10-12 within 3-6 months is a good deal for investors not only that capital appreciation is a good attractive to the market as well,” he added.
The Cofounder Noble Shareholders Association of Nigeria, Gbadebo Olatokunbo, said to sustain this bumper harvest, the government must remain focused, in addition to the provision of good regulations and improved business environment.
He added that with all these factors in place, the issue of rising NPLs would be checked in the banking sector, while the banks would continue to expand within and abroad.
“Before our economy was out of recession, the banking industry had taken positions on the way forward. We expect bumper harvest dividends because we have entered into the period of full economic recoveries in Nigeria,” he said.