Big Banks Deepen Concentration As Profit Gap Widens

(Sundiata Finance) — Nigeria’s big five or tier one banks are deepening their concentration as a percentage of listed lenders market capitalisation, balance sheet size and profitability.
Tier one lenders with primary listing in Lagos (First Bank, Zenith, Guaranty Trust Bank, Access Bank and United Bank for Africa), made up 71.68 per cent of the market capitalisation of N2.795 trillion of 14 listed banks, as at the end of December 2014, BusinessDay’s analysis of stock market data show.
The other nine banks (Diamond, Fidelity, FCMB, Stanbic IBTC, Skye, Union, Sterling, Unity and Wema Bank) together accounted for the rest, or 28.32 per cent.
The big five lenders as at the end of trading on Tuesday now make up 80.93 per cent of market capitalisation of N3.4 trillion for the 14 banks, a 9.25 percentage points jump from just three years ago, the data showed..
“The gap will continue to widen but the midsized banks can bridge this gap by identifying investors that have the capital to invest in them. Robust capital would give them the leeway to compete favourably with the big ones,” said Ayodele Ebo, Managing Director and chief executive of Afrinvest Limited, in a response to questions.
The gap between tier one and other mid-sized lenders is widening, as large cap bank shares rally on the back of a rebound in profits, following Nigeria’s economic downturn.
Tier one banks have also been better able to navigate the problem of non-performing loans.
Loan-loss provisioning charges for Nigerian banks amounted to over 2.5 per cent of gross loans at the end of year-end 2016.
Analysts say tier 2 banks were relatively more exposed to lower quality names and had less earnings buffers to take on additional asset quality stress.
The Nigerian banking sector reported a capital adequacy ratio (CAR) of 14.8 per cent, and return on assets (ROA) of 1.3 per cent, as of year-end 2016.
BusinessDay’s analysis shows that tier one lenders earned 83.69 per cent of the 13 lenders total reported net income of N499.26 billion last year (excluding Skye Bank which is yet to release Full Year 2016 numbers), up 11.46 percentage points from 72.23 per cent of the N514.24 billion earned by the lenders as at December 2014.
“Profit growth is largely dependent on mid-tier banks’ ability to boost their interest and non-interest income and also moderate their cost to income ratio. Revenue generation is always skewed towards interest income, which is constrained by the size of their loan book (since there is little flexibility on loan pricing, due to competition) and to some extent on their investment securities.
“In addition, their ability to mobilise deposits determines their capacity to grow their loan book. Ultimately, their profit, balance sheet and market size are hinged on their deposit mobilisation drive and success,” said Taiwo Yusuf, Head Asset Management, Meristem Securities Limited.
The data showed that Return On Equity (ROE) of the big banks is higher than the mid-tier names with Stanbic IBTC Holdings being an exception.
Stanbic also stood, as it is the only lender among mid-tier banks to grow its market capitalisation compared to 2014 levels.
Large banks have also consolidated in terms of total assets.
The large five banks saw their total assets rise to 72.09 per cent of the combined total assets of the 13 lenders of N27.1 trillion at the end of 2016 compared to 69.23 per cent in 2015.
A volatile and tough operating environment has also hindered the midsized lenders from raising capital, which further reaffirms the wide divide among Nigerian banks.
United Bank for Africa Plc, the third-biggest lender by market value, raised $500 million in its first Eurobond sale on June 1, at yields below initial guidance. This followed an equivalent issue a week earlier by Zenith Bank Plc, in a deal that was four times oversubscribed, and Access Bank’s $300 million issue of senior unsecured Eurobond debt at a coupon rate of 10.5 per cent late last year.
“Big banks have a pricing advantage,” said Vetiva’s Olabode. “That makes a big difference in size and capacity to do business.” (BusinessDay)

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