Analysts Say High Cost Structure, Inefficiencies Impacting On Banks Performance ‘Banks Should Slim-fit, Be Cost Efficient, Functional’

The burden of increasing cost of running banks in Nigeria, and a level of inefficiency has slowed down performance of the banking industry. This is in spite of the fact that a measure of respite has been predicted.
While operators funding mix trend upward, analysts view that banks performance remain bedridden on the back of inefficiencies.
As the Central Bank of Nigeria (CBN), the apex regulator in the banking sector continues to keep tab on Deposit Money Banks (DMBs) to ensure financial stability and avoid some latent surprises from operators that may rock the very economic bedrock of the nation, some experts are advocating for a leeway to encourage depositors and banks alike.
In 2017, operating business environment was tough, given the nation’s double digits lending rate and poor infrastructural base in additional to severely price energy cost. In addition, corporate entities are saddle with high operating expenses. This is expected to impact on business results including banks profitability performance.
Some pundits have noted that Banks alone cannot bring down interest rate on loans or make interest on savings attractive. They have a part to play especially getting rid of inefficiencies. Regulators and government (providing infrastructure) are also key actors in making the overall cost structure go down.
The development of some alternative savings medium that give depositors opportunities to have additional value on their savings is expected to impact on funding mix for banks. Thereby, both cost to income ratio and cost of funds are jerking up.
Noting the effect on the economy, some analysts are lending their voices to the issue facing the customers in conducting transactions with banks. In the recent time, depositors have been agitating for improvement in interest rate payment on deposit accounts. Analysts say that paying additional interest on savings accounts will impoverish banks performance.
“There are certain banks that are doing well in this regards. Don’t forget there are rules to paying interest on savings”; Jide Famodun, a Principal Consultant with LSintelligence told BusinessSense Newspaper. According to him, if you are constantly withdrawing from your savings, you may have to kiss your monthly interest payment a goodbye.
Chief Executive Officer at CowryWise limited, Rasaq Ahmed CFA say a number of things have to be considered. In his submission, the numbers tell the story behind the cost structure of the traditional banking system.
According to Rasaq, in financial year 2016, the banks reported combine profit before tax of N588 billion with an equity base of N4.5 trillion. To deliver that profit, the 14 banks had a combine deposit of N24 trillion and paid N759 billion in interest expense.
Simply, these banks paid 3.5 per cent per annum as interest on deposit. For additional interest, profits took a hit. At the interest of 6.2 per cent, the entire profit would be wiped off. At that interest rate, the 14 bank will report zero profit.
At 10 per cent interest rate, only two banks would have been profitable. GTB would have made N28 billion while Stanbic IBTC would have jogger N1.4 billion. In other words, the 14 banks would have recorded a combined loss of N840 billion.
Banks cost structure is on the high side. Despite the high interest rate on loans and multiple charges, it is near impossible for depositors to get anything meaningful on savings. This is as a result of combination of regulatory and macro factors, business model and inefficiencies. Banking needs to be redesign to be lean, cost-efficient and functional.
“Banks alone cannot bring down interest rate on loans or make interest on savings attractive. They have a part to play especially getting rid of inefficiencies. Regulators and government (providing infrastructure) are also key actors in making the overall cost structure go down. There is no silver bullet to it”, He added.
There are some banks that still lock down customers’ deposits. As such, customers are not allowed to draw on their account when the limits are reached. The limits which range from a thousand naira and above provide soft loans for many banks to trade with.
CardinalStone Partners, an Investment bank firm, in its 2018 banking sector outlook predicted that growth in bottom line will significantly slow down albeit positive on the back of low provision, interest expense and rising loan growth to largely offset the impact of lower asset yield.
A cursory look at the numbers show that Zenith bank Plc. interest expense has been moving up the radar while FBN’s interest expense pattern shows mix pattern just like GTB Plc.
Analysts at CardinalStone Partner in its report noted that high-interest rate era was not all good for the banks, particularly for banks with high exposure to corporate and term deposit.
The firm noted that during the high rate regime, cost of funds across our coverage banks inched up by an average of 30 basis points (compared to an average increase of 120bps in asset yield).
Surprisingly, GTB, UBA, and FCMB reported lower cost of funds when compared to the pre-high interest rate era. ACCESS and ZENITH, however, were the most impacted as cost of funds rose by 180 basis points and 140 basis points during the period.
We think the impact of the high-interest rate reversal will be more beneficial to ZENITH and ACCESS due to their high composition of corporate and term deposits while we expect the effect on the likes GTB, UBA, FBNH, and DIAMOND to be very marginal as a result of their relatively large concentration of low-cost (retail) deposits.
Overall, as interest rates continue to spiral downwards, we expect the resulting moderation in cost of funds to cushion the impact of lower interest income on bottom-line. However, given the higher sensitivity of interest income to interest rate, we expect the overall effect on Net Interest Income (NII) to be negative.

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