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Banks have recorded an uptick in profit, but the restriction the Central Bank of Nigeria (CBN) is about to place on government securities could cast a pall on future earnings.
Fees and commission income, reduction in impairment charge, and foreign exchange gains help compensate for a slow growth in gross earnings.
The cumulative net income of 12 largest lenders that have released first quarter results increased by 16.50 percent to N223.96 billion from N192.24 billion as at March 2017.
Drilling down the figures shows Access Bank recorded the fastest increases in profit, but Stanbic IBTC Holdings and Union Bank fell of the cliff as bottom lines shrank.
Lenders future earnings could be under threat as CBN moves to restrict their appetite for Federal Government Securities.
The Abuja based bank is set to roll out a comprehensive framework that would discourage the current high appetite by commercial lenders for government securities and encourage increased credit flow to the poorly-served productive sectors of the economy.
“The truth is that according to our own regulation, there is a particular minimum percentage of government securities that the banks must invest in to remain liquid, but again, we have observed unfortunately increasingly that banks rather than focusing on granting credit to the private sector tend to direct their focus mainly in buying government securities,” Emefiele said.
“The Monetary Policy Committee has frowned on that, and has directed the management of the CBN to put in place policies or regulations that will restrict the banks from unlimited access to government securities,” he said.
The first quarter financial statement of Nigerian banks shows profit has been growing at a slow pace while interest income on loans and advances and treasury bills shrank.
Analysts say it is practically difficult to turn on the tap of lending to the economy when the real sectors are not de-risked.
Decrepit infrastructure, high cost of doing business and low consumer purchasing power have hindered companies from magnifying operating profit that will enable them pay interest on loans borrowed from financial institutions.
Additionally, banks are still recovering from deteriorating asset quality, brought on them by the precipitous drop in crude oil price that crippled business in 2016.
“Restricting banks’ investments in government securities in the face of continued borrowing by the government, may imply an increase in rates on these instruments as a high percentage of the demand from banks would be cut off and rates would need to remain attractive to fill that demand,” said analysts at CSL Securities Limited.
“Apart from the negative impact on profitability, as returns on these investments are guaranteed, banks may see an increase in funding costs as deposits will naturally leave the banks for more attractive yields on fixed income instruments,” said analysts at CSL Stock Brokers.
Banking sector index has shed -12.81%, this compares with NSE ASI of -1.18 percent.
First Bank (-11.32%), GTB (-9.72%), Zenith (-17.57%), UBA (-25.32%), Access (-14.71%), all underperforming the NSE ASI Index.