BY OBINNA CHIMA
Tougher regulations as well as anticipated higher cost of fund costs are likely to constrain Nigerian banks' profitability over the next 18 months, global rating agency, Fitch Ratings has predicted.
In fact, the agency forecast that Nigerian banks are unlikely to see a repeat of their robust 2012 profits because of increasing pressure on earnings.
The Central Bank of Nigeria (CBN) had been focusing on consumer protection and encouraging financial inclusion and had outlined plans to phase-out most of the fees and commissions in the industry.
In addition to this, the latest decision by the CBN to indirectly tighten monetary conditions by raising the cash reserve requirement (CRR) for all public sector funds to 50 per cent from 12 per cent was also identified as another factor that could weaken banks' earnings as the financial institutions would have to scramble for deposits to maintain their level of liquidity.
Therefore, Fitch said: "We expect new limits on bank charges imposed by the central bank to dent what have been highly profitable fees and commissions, particularly for those with large retail franchises. The most significant impact is likely to arise from the gradual phasing out of Commission on Turnover (COT)- a customer transaction fee - by 2016.
"We expect banks to fill any funding short-fall with more expensive sources or by selling liquid assets, leading to a sharp negative impact on net interest margins."
Fitch pointed out that high treasury bills yields last year boosted banks' interest income. "Although continuing tight monetary policy indicates that a sharp fall is unlikely, the yields have fallen slightly so interest income from banks' large sovereign bond portfolios is likely to be lower in 2013. The central bank has also stipulated that interest rates for savings deposits should not be lower than 30 per cent of the monetary policy rate, currently at 12 per cent.
"Overall, there could be at least an average 100-200 basis point negative impact on margins over the next 12 to 18 months. Further margin pressure may arise if the authorities impose caps on lending rates to nationally important sectors, such as SMEs or agriculture," Fitch argued.
Furthermore, the firm indicated that with the development in the industry, the cost of the cleanup of the recent banking crisis was also rising, even as it anticipated a 200-300 basis points increase in cost/income ratios in the Asset Management Corporation of Nigeria's (AMCON's) annual level to 0.5 per cent of total assets, from 0.3 per cent.
It however pointed out banks would be able to partly offset the earnings pressure by boosting volumes, widening the range of fee-based products and concentrating on low-cost deposits.
"The AMCON bond maturities in December 2013 and October 2014 should give banks additional liquidity to expand as the AMCON bonds will be repaid with a mixture of cash and treasury bills. But if growth leads to a loosening of underwriting standards or exposure to new and untested segments, such as mass retail or the newly privatised sectors such as power, then there could be a relapse of bad debt problems.
"Weaker earnings and rapid growth would put greater pressure on capital. High capital buffers are necessary as the banking system is exposed to concentration risks and Nigeria's short credit cycles. These risks are reflected in the banks' low 'b' range Viability Ratings.
"A key rating driver is the maintenance of adequate core capital to support their growth in a difficult operating environment (Nigeria is rated 'BB-'/Stable). We would not view Tier 2 issuance as a substitute for raising new equity to support any material asset growth," it added.
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