Higher Interest Rates Raise Banks’ Income Amid Shrinking Loan Book

(Sundiata Finance) –Nigerian Banks have seen interest income spike on the back of increased interest on loan book and investment securities, despite slow growth in loans and advances and deposits.

Analysts also attribute the growth in revenue to repricing, on the back of a high interest rate environment which resulted in increased yield on assets.

The banks have dollar denominated loans and as a result of the devaluation of the currency, interest income increased year on year, despite zero loan growth, according to Ayodeji Ebo, Managing Director Afrinvest Securities Limited.

“There is an alternative investment, Treasury bills (T-bills) which is at an attractive rate. Banks will prefer to invest in T-bills and earn yield of over 22 per cent and 23 per cent,” said Ebo. “It’s only rational for them to key into this attractive investment.”

The cumulative total interest income of the 12 lenders that have released Half Year 2017 results, spiked 31 per cent to N952.45 billion, while income from investment securities (T-bills and debt securities) surged by 52 per cent, to N383.03 billion in June 2017.

Drilling down into the figures shows Guaranty Trust Bank (GTB), the largest lender by market value, recorded 20 per cent increase in interest income on loans to N104 billion, while income from T-bills and debt securities surged by 162.07 per cent to N60.88 billion.

Zenith Bank’s interest income from loans, increased by 35 per cent to N178 billion, while income from T-bills and debt securities spiked by 67.61 per cent, to N81.36 billion.

Access Bank’s interest income from loans increased by 35 per cent, to N123.30 billion, while income from T-bills and debt securities moved by 34.90 per cent to N38.6 billion. First Bank Holdings’ interest income from loans was up 17 per cent, to N142.36 billion, while income from T-bills and debt security surged by 91 per cent to N81.59 billion.

United Bank for Africa (UBA)’s income from loans spiked by 51.0 per cent to N98.18 billion, while income from T-bills and debt security jumped by 38.56 per cent to N53.56 billion.

Recent Central Bank data shows a widening gap between average interest rates on Savings and Time Deposit and yield on T- bills.

Interest rate of on savings deposit of 24 lenders was 4.20 per cent, while the average interest rate on Time Deposit stood at 11.70 per cent, lower than the yield on T-bills of 22 per cent and 23 per cent, as investors are increasingly putting money in government securities because of a risk free rate of return.

The apex bank has revealed plans to sell N917.1 billion worth of treasury bills in the next three months ending November 30.

The apex bank issues T-bills twice a month to help fund its budget deficit, support commercial banks to manage liquidity and curb inflation.

Cost of fund (CoF) among Nigerian banks also went up, as lenders are forced to up deposit rates because investors are liquidating deposits and investing in T-bills.

Zenith Bank’s CoF increased to 6.4 per cent in June 2017 from 3.20 per cent the previous year. Access Bank’s Cof moved to 6 per cent in June 2017 as against 3.60 per cent the previous year. GTBank’s CoF moved to 2.92 per cent in June 2017 from 2.78 per cent the previous year.

First Bank Holdings Plc’s CoF rose to 3.50 per cent in June 2017 as against 2.40 per cent the previous year.

Midsized lender, Fidelity Bank’s CoF increased to 7.40 per cent in the period under review, from 4.60 per cent as at June 2016.

While revenue is rising among lenders in Africa’s largest economy, total loans in the balance sheet are growing at a very slow pace.

This can be attributed to cautious efforts by banks to derisk the balance sheet.

The cumulative total loans and advances to customers of the 12 lenders that have released Half Year 2017 results dipped by 1.0 per cent, to N13.37 trillion in June 2017.

This compares to the half year period to June 2016 when loans and advances to customers spiked by 18.87 per cent or N2.01 trillion to N12.71 trillion.

“It is not surprising that loan book continues to shrink. Coming into the year, we had expected credit growth to be contained in 2017 as banks take a cautious stance on credit expansion, given the heightened risk environment,” said Olalekan Olabode, Head, Research Division Vetiva Capital Management Limited. (BusinessDay)

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