Big Banks Take Back Seat as Small Banks Increase Loans to Economy

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The country’s small bank, often referred as Tier-II banks are growing their loan books even as the big banks keep a tight lid on theirs.
Data compiled by Business Day show that while the big banks, often referred to as Tier-I banks largely cut back on loans and advances to customers in the first half of the year, small banks gave out more loans.

“The small banks are taking an aggressive approach to lending because they need to grow their balance sheet, while the big banks are holding back and de-risking their balance sheet,” in an economy that is not growing convincingly and is faced with political uncertainty ahead of the 2019 presidential elections, said Johnson Chukwu, CEO of asset management company, Cowry Assets.

“If the small banks can manage the quality of the risks they are taking and it translates to higher interest income, it provides a window for them to catch up with the Tier-I banks,” Chukwu said.

The loan books of Guaranty Trust, Zenith, Access, United bank for Africa and First bank, shrank cumulatively by 6.6 percent as at June 2018 compared to the level at the end of 2017, with two of the country’s most capitalised banks, GTB and Zenith contracting the most by 11 percent a piece.

While big banks have taken a conservative approach towards lending this year, the loan books of smaller banks from Sterling to Fidelity bank has risen sharply, with exception of Ecobank and Diamond bank.

Sterling bank and Fidelity grew their loans by 20 percent and 10 percent respectively, while Stanbic Ibtc and Wema bank grew theirs by 9 percent each.

Those loans primarily went to Micro, Small and Medium Enterprises (MSMEs), according to spokespersons from two of the banks (Sterling and Fidelity).

“We are big on small businesses and have created several loan products for that segment,” a spokesman of one of the banks said.
While Union bank slightly increased its loan to customers by one percent, Diamond bank and Ecobank bucked the trend after their loan books contracted 30 percent and 9 percent respectively.

According to its financial report, Sterling Bank boosted loans by the most to the consumer sector, following a 48 percent spike to N8.5 billion as at June 2018 from N5.7 billion from December 2017. Sterling bank has capital adequacy ratio of 12.1 percent, just above the regulator’s minimum threshold of 10 percent for its category of banks.

The manufacturing sector was most attractive to Fidelity bank while Stanbic IBTC loans to the downstream petroleum sector saw the biggest jump over the six-month period under review.

Nigerian banks pulled the plugs on private sector lending to manage a worrying spike in non-performing loans, after the economy slumped to its first recession in 25 years two years ago, causing loans to go bad and threatening the asset quality of lenders.

The economic crisis was triggered by the decline in oil prices and production and because banks were largely exposed to the oil and gas sector, bad loans spiralled out of control in 2016 but the situation has since improved after an oil-led recovery took the economy out recession in the second quarter of 2017.

Oil prices have rallied and production in the Niger-delta has stabilised, having been disrupted by militant attacks in 2016. Brent crude is selling above US$80/barrel and has more than doubled since 2016’s average of $38 per barrel.

Other macroeconomic indicators have also improved. The economy expanded some 1.7 percent in the first half of this year and is tipped to expand by the International Monetary Fund (IMF) to grow by 2 percent by year-end compared to 0.8 percent in 2017 and -0.5 percent in 2016. Although in GDP per-capita terms, the economy is still in recession with economic growth rate below the population growth rate of around three percent.

Inflation has declined significantly to around 11 percent from a peak of 18 percent in January 2017 and FX liquidity has improved, helping the exchange rate stabilise at around N360 per USD at a market-driven window called the Investors and Exporters window. The window was created by the CBN in April 2017 to boost autonomous dollar inflows.
Armed by the improved economic situation, banks largely forecast 10 percent loan growth during investor presentations at the start of the year, but earlier than expected political tensions heading into the 2019 presidential elections and fragile economic activity have forced banks to renege on their promise and be conservative with credit creation.
The recent upturn in yields on government securities is another competition for bank credit.
Banks could pile even more cash into government securities in the coming months as rising interest rates in the US after yet another hike in September and guidance for one more this year and two in 2019, could feed into Nigeria’s risk premium, pushing yields on government securities up, so that they are attractive for foreign portfolio inflows.

“As a big bank in a relatively challenging environment, it is difficult to grow loan book,” said Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham. “To get new credit worthy clients in the current economic situation is not straight forward unless they want to throw away money. It seems a good strategy to me,” Ibrahim added.

“It makes sense that as yields rise, the big banks that have the advantage of size over the smaller ones will look at high yielding government securities once more.”

Yields on government securities are hovering around 14 percent, after starting the year at around 12 percent.
Banks made a killing from investing in treasury bills last year but were already starting to adjust to a lower yield environment informed by reduced government borrowing in the domestic market. Yields are, however, headed back north thanks to rising interest rates in the US.
The Federal Reserve Bank of America raised interest rate for the 3rd time this year to a range of 2-2.25 percent last Wednesday.

The rate hike is set to increase capital outflow from emerging markets and increase Nigeria’s risk premium as investors will demand higher yields for the Nigerian market to remain attractive enough to retain foreign capital.

The Monetary Policy Committee last week held interest rates at 14 percent, where it has been for two years now, despite declining inflation and exchange rate stability.

The Central bank governor, Godwin Emefiele, said rates were retained to keep naira assets attractive to foreign portfolio inflows amid rising US interest rates. (BusinessDay)

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