The Central Bank of Nigeria (CBN) set a record high for the benchmark interest rate in the first three months of 2024, which caused the earnings of some of the country’s largest banks to more than triple.
This represents a shift from the past when the depreciation of the naira brought the banks enormous gains in foreign cash and enhanced their profits.
BusinessDay examined the most recent financial filings of eight banks and found that, compared to the same period last year, their combined after-tax profit increased by 264.5 percent to N1.13 trillion in Q1.
…Zenith, FCMB, and GTCO lead in terms of profit increase.
Zenith Bank Plc, Access Holdings Plc, FCMB Group Plc, Stanbic IBTC Holdings Plc, Fidelity Plc, Guaranty Trust Holding Company (GTCO) Plc, United Bank for Africa (UBA) Plc, and Wema Bank Plc are the companies involved.
According to analysts, the surge in interest income from effective asset repricing in response to the elevated interest rate environment was a major factor in the commercial banks’ earnings spike.
Payments from the bank’s interest-bearing assets are known as interest income or revenues.
“The majority of the banks’ profit was primarily driven by a rise in interest income. Check out their loan books for 2023; they have grown dramatically. This year has seen a similarly large rise in loan books, according to Olumide Sole, a sub-Saharan banking research analyst at Vetiva Capital Management.
According to him, the growth of the loan books is primarily due to translation rather than bank lending, and as the value of the naira declines, loans—particularly international ones—will keep growing.
“There has been enough growth in foreign loans to indicate a notable increase. Due to the current state of the economy, banks are not making loans. They are giving to just cash-generating firms because they are quite conservative,” he continued.
After the records were examined more closely, it was discovered that the banks’ total interest income increased to N2.40 trillion in Q1 from N977.4 billion, while client loans and advances increased by 108.7% to N1298.1 trillion from N617.6 billion.
“Lending is the primary activity of banks, and in order for them to disburse loans, they must collect an interest fee. The asset may be repriced in response to an increase in interest rates. Their primary business is lending, but they must reprice their asset, which they will do if interest rates stay high,” according to Nabila Mohammed, a Chapel Hill Denham financial analyst.
She claimed that since entry-level investors are attracted to market yields and the CBN’s interest rate hikes were evident at the start of the year, banks are benefiting from both loans and investment securities.
However, since the banks are unable to reprice their assets and fail to compensate their depositors, the victors will be those who can effectively manage their interest expenses. Making sure they have a mix of low-cost deposits will help the banks control their cost of funds.
In terms of profit growth, GTCO, Zenith, and FCMB led…
GTCO experienced the greatest profit growth, rising from N58.2 billion to N457.1 billion (685.4%), ahead of Zenith, which saw a gain of N291.4 billion to N258.3 billion. UBA’s earnings increased by N166 percent to N142.6 billion, while FCMB had a 209.7% increase to N28.8 billion.
In a recent note, analysts at Cordros Research stated that GTCO’s interest income increased by 170.6 percent on an annual basis to N281.7 billion. This increase was driven by higher income from customer loans and advances (91.0 percent), investment securities (307.5 percent), and cash and bank balances (265.9 percent).
They said, “We note that Holdco’s earning asset increased by 104.3 percent year-to-date to N10.18 trillion as growth in core income was also supported by the high-yielding environment.”
Growth across all major income lines was the primary driver of FCMB’s performance, according to a recent note from Vetiva Research. “As a result of the bank’s assets being effectively repriced in response to the current high-interest rate environment, interest income increased by 90% year over year to N125 billion.”
In an effort to combat inflation, the CBN increased its monetary policy rate by 200 basis points to 24.75 percent in March, the second consecutive increase. The CBN raised interest rates to 22.75 percent in February, a 400 basis point hike.
The prime bank raised the rate by 750 basis points to 18.75 percent last July from 11.25 percent in March 2022 before the climb to 24.75 percent.
The naira depreciated from N463.38/$ to N 1459.7/$ as of May 9, 2024, as a result of the liberalization of the foreign exchange system in June, in addition to the MPR rise. The naira is trading at about 1,422.5/$ on the black market, compared to 762/$ prior to the FX reform.
Following the February MPR hike, a few banks began to raise their lending rates. Zenith increased their interest rate from 25 percent to 30 percent by 500 basis points.
In reaction to the MPR hike, GT Bank raised its lending rate by 500 basis points, and Stanbic IBTC raised the interest rate on its loans by 300 basis points.
