Did Nigeria’s banks resist Covid-19? Access, UBA, GT, First and Zenith under the microscope

In depth
This article is part of the dossier: Banking Africa

By Ruth Olurounbi
Posted on Wednesday, 17 November 2021 10:29

A Zenith Bank logo is seen on a sign on top of the bank in Freetown
A Zenith Bank logo is seen on a sign on top of the bank in Freetown, Sierra Leone August 19, 2017. REUTERS/Afolabi Sotunde

Have Nigeria's banks weathered the Covid-19 storm? We look under the hood of five of Nigeria's biggest banks - Access Bank, FIrst Bank, United Bank for Africa, Guarantee Trust Bank and Zenith Bank - to see how the machinery is running, as part of our wider series on Africa's top 200 banks.

Despite a tough 2020 driven by shocks from the global coronavirus pandemic that crippled most economies, the Nigerian Central Bank says it sees a “broad improvement in all banking system parameters, despite the downside risks posed by the pandemic to the smooth running of businesses,” according to Governor Godwin Emefiele, during the September monetary policy committee briefing in Abuja, the nation’s capital.

Access Bank

Last year, the difficult macroeconomic environment made the attainment of financial targets very difficult for several banks, including Access Bank, Nigeria’s biggest lender, according to its chairperson, Dr. Ajoritsedere Awosika.

Still, the bank recorded N764.7bn ($1.8bn) in gross earnings, despite the year being “characterised by a low interest rate environment, foreign exchange challenges, recession, accelerated inflation, asset quality issues and civil unrest,” Awosika says in the bank’s 2020 financial report.

In its half year report for 2021, when compared with 2020, the bank reported a 13.6% increase in gross earnings to N450.6bn from N396.7bn in the previous year, earnings from commission and fees which rose to N58.7bn from N40.5bn the year prior. The bank also increased its loan book from N3.6trn to N3.9trn.

The bank’s profit before tax grew by 31% year on year (y-o-y) to N97.5bn, from N74.3bn, and its Cost-to-Income Ratio stood at 60.1%, a 570-basis point reduction from 65.8% in H1 2020. However, its loan losses remained high at N28.6bn in the first half of this year, compared to N29.6bn incurred last year, which puts a major strain on the bank’s profitability, according to financial experts, including Olumide Adesina, a senior market research analyst at SA Shares.

Its non performing loans (NPL) ratio stood at 4.3% as at June 2021, compared with 4.3% in December 2020.

“Increasing provisioning by Nigeria’s biggest lender, [through] assets, may likely limit the growth of the bank as a significant amount of its liquidity is tied to such parameters. A bigger provision could be the result of [Access Bank] entering the crisis with more risky loan portfolios and a consequent higher risk weight, as well as a lower risk-weighted capital ratio.

“In addition, higher interest margins could have come from riskier loans that, in bad times like the worst pandemic still in play, would require higher provisions. The provision for cash flow can also affect the capital costs of the bank, that is, a factor that results in a discount of cash flow,” Adesina tells The Africa Report.

The bank issued a $500m Senior Unsecured Eurobond from the international debt capital market in September, according to a notice from Nigeria Exchange Group (NGX). The net proceeds of the Eurobond will help provide medium-term funding, as well as enhance the capacity of the bank to support its general banking purposes, the bank said in a statement.

The senior Eurobond 5-year unsecured note (144A/RegS), which was sold under the bank’s $1.5bn global medium-term note programme, was issued with a yield and coupon of 6.125%, with interest payable semi-annually in arrears.

Important to note is that the bank announced that it completed acquisitions in South Africa, Mozambique, and Zambia, and will continue to grow its presence in “geographies with significant growth potential, especially where they support our global customers,” according to the managing director, Herbert Wigwe.

First Bank Nigeria (FBNH)

As one of Nigeria’s oldest banks, the first half year has been eventful, following allegations of misconduct, including poor corporate governance and insider dealings. These led the Nigerian regulator to oust First Bank’s board for hiring a new CEO, an action that CBN governor Emefiele said threatened financial stability in Africa’s biggest economy.

FBNH posted a 1.7% (y-o-y) decline in its gross earnings in the half year of 2021 to N291.2bn, from N296.4bn the year prior. The bank reported that its gross earnings however improved by 13.2% in Q2 21, compared to Q1 21. A 22% decline in interest income, which was caused by a 56% drop in investment securities income, led to a slight earnings drop in the first half of 2021.

The bank’s non-interest income increased significantly by 48.1% y-o-y to N118.7bn from 80.1bn in 202o, while its electronic banking fees grew by 32.7% y-o-y, “despite regulatory developments reducing fees by c. 50%”, the bank says it in its financial report.

FBNH reported strong net earnings growth from commission and fees, rising N57.3bn from N46.7bn, the second highest in the sector after Access Bank. However, its operating expenses surged by 9.6% y-o-y, driven by a spike in personnel expenses (+3.4% y-oyy to N51.24bn), AMCON levy (+35.4% y-o-to N30.68bn), and NDIC premium (+9.4% y-o-y to N6.81bn). Its Net-Interest Income decreased by 20.9%, from N131.3bn in H1’20 to N103.8bn in H1’21. Profit before tax increased by 9.2% to N45.2bn in H1’21 from N41.4bn a year prior.

The bank said it plans to increase ROE by more than 20% by 2024, while decreasing CIR by more than 58% and NPL by more than 5% in the same time period.

United Bank for Africa (UBA)

Nigeria’s third most profitable bank, after Zenith Bank and Access Bank, reported a 5.1% increase in gross earnings for the first half of the year, rising from N300.6bn to N316bn, according to a financial report posted on its website. Growth in gross earnings is driven by 8.3% and 33% respective growth in interest income and fees and commission income, the bank says in the report.

Interest income for the period was “buoyed by earnings from term loans to individuals, corporate overdrafts and bonds investments,” with interest from loans to corporate customers now accounting for 48% of the total interest income, the bank says. Still, interest from loans to corporate customers declined marginally y-o-y by 1.4% in line with the prevailing low-rate environment in its largest market, Nigeria. However, interest income from retail loans grew by 94.3% to N12.6bn, driven “partly by the early successes recorded in our flagship retail lending proposition,” according to the bank.

UBA is one of the few banks in Nigeria to record higher gross earnings year [on] year as Nigeria’s top tier 1 bank…

Its assets rose by 8.0% from N7.7trn in H1’21 compared to N8.3trn ($20.4bn) in H1’21, driven largely by growth in investment securities, customer loans and placements, as well as a “well-diversified balance sheet, with over 50% of the assets in liquid, low-moderate risk instruments,” according to the bank.

Profit after tax rose 36.3% in H1’21 to N60.54bn versus N44.43bn in H1’20 and the bank grew its net commissions and fees income from N38.5bn to N45.7bn. Customer deposits grew by 7.4% to N6.09trn in the first half year of 2021, compared with N5.67trn in the full year of 2020.

“UBA is one of the few banks in Nigeria to record higher gross earnings year over year as Nigeria’s top tier 1 bank, which has the highest amount of customer deposits at N6.1trn. In spite of the global lockdown caused by the Covid-19 pandemic, this achievement highlighted its strong customer base and strengthened the bottom line of the pan African institution,” SA Shares’ Adesina says.

Guaranty Trust Bank (GTCO)

Guaranty Trust Bank restructured into a holding company this July, saying it expects new business structure to position it for growth and ensure profitability, as it becomes Guaranty Trust Holding Company Plc (GTCO).

“We believe that a holding company structure will allow us to take advantage of new business opportunities in the emerging competitive landscape and strengthen our earnings base… With our corporate reorganisation, we will be able to do more to help our customers thrive in this new world of digital technologies and unprecedented possibilities,” Segun Agbaje, GTCO’s group chief executive officer had said at the time.

A half-year performance report however showed a disappointing performance, as it posted underwhelming financial results that analysts at Chapel Hill Denham say “are uninspiring”. The bank’s half year profit after tax in 2021 declined by 15.8% y-o-y to N79.4bn from N94.3bn as of 30 June 2020. “While we had anticipated the operating cost pressures (+7.2% yoy to N89.33bn in H1-21) over the period, we did not envisage the marked erosion to interest income from investment securities. The weakness in this line accounts for the bulk of the deviation from our FY-21E EPS forecast,” Damilola Olupona and Tajudeen Ibrahim, analysts at Chapel Hill Denham, say in a note.

“At current run rate, GTCO is on the path to underperform last year’s EPS and deliver ROAE below 20%. If this materialises, on an ROAE basis, GTCO could be on the path to reporting its worst earnings in a decade,” the analysts say.

GTCO reported a 7.65% decline in gross earnings, falling from N225.14bn in the half year of 2020 to N207.91bn in the half year of 2021. Decline was driven by a fall in net interest income, which fell by 16.11% from N127.62bn in H1’20 to N107.06bn in H1’21. The fall was largely driven by marked decline in yields on assets (-372bps yoy to 8.14% in H1-21), which masked cost of fund reduction (84bps yoy to 0.64% in H1-21) in the same period, Chapel Hill Denham say.

Even as asset quality remained solid, analysts say concerns from the retail loan book are creeping in. The NPL ratio dropped to 6% quarter on quarter (Q-o-Q) in H1 ’21, while NPLs from loans to individuals rose to 22.3% in H1’21 from 19.5% in full year 20, on impact of pandemic-induced strain on consumer wallet being main driver of the rising NPLs.

Zenith Bank

Nigeria’s second-largest banking group, representing 16% of domestic banking-system assets at end-2020 as per London-based Fitch Ratings, reported a decline of 0.15% in its gross earnings for the half-year of 2021, from N346.09bn in 2020 to N345.6bn.

The bank reported that its interest income declined from N216.9bn in H1’20 to N203.9 in H1’21, but it noted a significant increase in net commission and fees, growing from N33.5bn in H1’20 vs 47.6bn in H1’21, which mitigated the drop in interest income.

Based on our analysis, for every one naira depreciation in the currency, the bank could report a N1.4bn in FX revaluation gain.

Zenith Bank Group recorded a growth in profit before tax of 3%, rising to N117bn from N114bn reported in the previous year, according to a statement on its website. The bank also reported a 9% growth in non-interest income from N116bn in June 2020 to N127bn in 2021, while interest income dropped by 6% from N217bn to N204bn as yields from some interest-bearing assets declined.

“Overall, the significant reduction in interest expense by 26% and growth in non-interest income by 9% gave rise to improved profitability. The Group’s retail journey continues to deliver positive results,” the bank says in the statement.

Retail deposits grew by N38.2bn, from N1.72trn to N1.76trn year-to-date (YTD). Savings balances grew marginally by 2% YTD to close at N1.18trn from NGN1.16trn as at December 2020. The drive for increased retail deposits and a low-interest yield environment helped reduce the cost of funding from 2.2% to 1.3% in the current period.

However, the low-interest environment also affected the net interest margin, which declined from 9% to 6.5% in the current year due to the re-pricing of interest-bearing assets. Operating expenses grew by 10% y-o-y, but growth remains below the inflation rate, analysts say.

Returns on equity and assets also declined from 21.5% to 18.5% and from 3.0% to 2.5%, respectively, but the bank reported an improved Earnings per Share (EPS), which grew 2% from N3.30 to N3.38 for the half year ended June 2021. The bank also increased total customer deposits by 8% to close the period at N5.77trn, demonstrating growth in the bank’s market share, according to the statement. Total assets grew marginally to N8.52trn as at 30 June 2021, from N8.48trn as at 31 December 2020.

The future

The bank’s immediate strategy, according to a September 15 note from the analysts at Chapel Hill Denham, is to harness the opportunities in the fintech ecosystem. To achieve this however, the bank has decided to “play at the top end of the value chain where it serves as banker for the fintechs rather than setting up a separate fintech company to earn fees,” the note says, citing a conversation between the analysts and the management of Zenith Bank Group.

The bank, the analysts say, is not in a hurry to transition to a Holdco structure, as other banks, including Guaranty Trust Bank and First Bank of Nigeria have, adding that “recent efforts at growing retail deposits is not aimed at transforming the bank from a corporate to a retail bank.” The overarching driver of the retail deposit mobilisation remains cost of funds reduction, which will consolidate its corporate offerings, the analysts said.

Chapel Hill Denham analysts posit that “Zenith Bank is positioned to benefit the most from a naira devaluation”, citing the bank’s net FCY position which stood at $1.4bn as at H1 ’21. “Based on our analysis, for every one naira depreciation in the currency, the bank could report a N1.4bn in FX revaluation gains. That said, our base case forecast for FY-21E USDNGN of N430/$ suggests that the bank could report N26.65bn in FX revaluation gains this year. Notably, the bank reported a 33.2% ytd dip in FX revaluation gains in H1-21 to N712.31bn,” the analysts say.

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