There are strong indications that Net Interest Margin of (NIM) of commercial banks in the country is being squeezed as large firms turn to non-banking avenues to raise capital.
Nigerian Tribune reports that Net Interest Margin has led to increased financial disintermediation, just as mobile banking and threat from financial technology (fintech) firms lead to higher cost-to-serve and lower profits in banks relative to other industries.
Confirming the above about Net Interest Margin, Mr Bismarck Rewane and the Financial Derivatives Company (FDC) Think Tank at August’s session of the Lagos Business School (LBS) Breakfast Club said:
“The result of this spate of financial disintermediation is that the net interest margin of banks are being squeezed. The CBN is also encouraging this trend by explicitly agreeing to participate in the commercial paper market as a way of increasing the availability of credit.”
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According to the team, the banking industry is becoming more competitive and cannibalised.
At the Nigeria Stock Exchange, the market has lost 4 per cent in 2018 as against a gain of 37 per cent during the corresponding period of 2017. Many corporates including Dangote and MTN are issuing commercial papers and other instruments to reduce financial costs.
Meanwhile, Lagos-based CSL Stockbrokers Limited, a research and financial advisory company, in a report titled, ‘Tier 2 Banks- Emerging Rays of Silver Lining,’ anticipates that Nigerian banks will not replicate the spectacular performance they witnessed in 2017, after the economy exited a biting recession.
The report stated: “Increasing levels of non-performing loans (NPLs) in the books of some banks in the aftermath of the recession amid poor macro-economic conditions caused most banks to put a rein on credit growth in 2017.
“As at first quarter 2018, the tier-2 banks within our coverage reported decline in loans by an average of three per cent.
“Most banks deployed more funds to the high yielding and less risky fixed income market. However, based on communication from the banks, moderating fixed income yields should compel banks to create more risk assets.”
It projected an average loan growth of about 11 per cent for the tier-2 banks within our coverage and we expect most of the loan growth to take place in the second half of the year.
“We do not expect significant deterioration in asset quality this year as oil prices appear to be favourable and foreign exchange liquidity remains robust following the introduction of the Investors and Exporters’ (I&E) window last year,” it added.
The Nigerian banking sector adopted the International Financial Reporting Standard (IFRS) in 2012.
IFRS 9 prescribes new guidelines for the classification and measurement of financial assets and liabilities, making fundamental changes to the methodology for measuring impairment losses, by replacing the “incurred loss” methodology with a forward-looking “expected loss” model.
For the tier-2 banks, the report noted attempts by many of them to raise debt capital to shore up their capital base, saying it was expected to result in an increase in funding costs this year.
According to it, “The trend in non-interest income growth has been southwards over the last three years during which the CBN implemented a gradual phase-out of commission on turnover (CoT).
“Interestingly, some of the banks, especially the larger ones, have managed to claw back commissions through other channels. The mid-tier banks on the other hand have found it more difficult to do same.
“Card fees also took a hit on account of restriction on dollar card transactions. Nigerian banks were forced to reduce (and in some cases suspend) forex transactions on their Automated Teller Machine cards (debit and credit) in the face of acute dollar shortage precipitated by shrinking petrodollars, tighter FX policies and reduced portfolio inflows.
“Capital adequacy is a persistent issue for a number of Nigerian banks. Regulatory capital ratios were impacted by the depreciation of the naira given the extent of dollar lending in the sector. They were also hit by a sharp rise in impairments in some cases.”
The CBN requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15 per cent, while banks without international subsidiaries maintain a CAR of 10 per cent. The minimum requirement for systemically important banks is 16 per cent.
and then