Banks in the country are facing a profit squeeze this year as a result of new measures to help the economy that are also partly designed to get them to lend more to domestic businesses and consumers.
Reuters is projecting that banks’ earnings may fall by 10 percent in the first quarter, even as the sector’s stock is already down by 250 basis points (bps).
The shedding of weight in profit is a fall out of Central Bank of Nigeria (CBN)’s rules set to curb liquidity  which is already hurting profits.
Nonetheless, the banks plan to bounce back through the power sector.
The banking sector, which was bailed out in a 2009 financial crisis, has been making bumper profits by mopping up government deposits and using the cash to buy high-yielding treasury bonds. As a result, the banks have had little incentive to lend to Nigeria’s real economy.
But new reserve requirements from the central bank in the summer may change all this. They have already put pressure on bank earnings. Some banks are looking at lending for power projects and advisory work on energy deals to try to compensate.
The financial sector in Africa’s second biggest economy is growing fast, as banks tap into GDP growth of 7 percent. The sector accounts for 40 percent of the local stock market. Total banking assets have almost doubled in two years to 21 trillion naira ($132.1 billion) as at December, 2012.
But bank lending is mainly to government or multinationals rather than to domestic businesses or retail customers.
Nigeria, Africa’s most populous country, with more than 160 million people, has a housing shortage of some 17 million units. But housing finance is limited. There are only 20,000 mortgages in the country in 2013, according to Ministry of Finance data.
This is partly because banks have been making easy money by paying 1-2 percent interest for holding government deposits and using the cash to buy government bonds yielding around 14 or 15 percent. Banks’ holdings of government deposits were about 10 percent of total deposits and 25-30 percent of total loans before the new rules came in, according to central bank data.
The central bank’s action was mainly aimed at bolstering the naira and dampening inflation. But central bank governor Lamido Sanusi said at the time he wanted to remove a perverse incentive whereby banks could profit by lending the government its own money.
The new measures raised the cash reserve requirement for banks holding government money to 50 percent from 12 percent, which means they have to hold half of those deposits with the central bank.
Since then, nine-month profits are down for five banks that have released results and the trend is expected to continue into the fourth quarter.
The directive by the central bank … will continue to have a negative impact on banks’ ability to create earning assets,” said George Bodo, banking analyst at Ecobank, adding that he expected fourth quarter bank earnings to decline by 10 percent.
Unity Bank, where government funds are more than a third of its deposits, reported a 73 percent fall in third quarter profit year-on-year.
Diamond Bank said last week that the reserve requirement hike would negatively affect the industry. It expects to only meet the low end of its profit forecast of 30-35 billion naira. Last year’s profit was 27.5 billion naira.
“We grew all the indicators on the balance sheet but did not generate income in the same proportion,” Francis Ikenga, head of strategy for Fidelity Bank told Reuters, attributing a 16 percent profit fall to the tighter liquidity.
The stock market index of Nigeria’s top-10 banks has priced in lower profits, shedding 2.5 percent in the last two weeks, but is still 17.5 percent up on the year.
The IMF has warned in a note on Nigeria in October that the increased cash reserve requirements imposed additional costs on banks, which would be passed on to the economy.
So far, though, there are signs banks are looking at new avenues for lending to compensate for the profit pain.
A number have been advising oil and gas deals in Nigeria, Africa’s top oil producer, with several asset sales by oil majors to local buyers in the works. Some are also lining up to finance power projects after Nigeria sold its power plants in a $2.5 billion privatisation in September.
United Bank for Africa, with operations in 19 African countries, has spent $700 million in financing power assets this year and plans to put $2 billion into power projects in the next three years.
Fidelity, Access Bank and GT Bank have raised $1 billion in total in Eurobonds for the power sector and oil and gas lending. First Bank, Nigeria’s biggest bank by total assets, is to buy ICB’s West African banking assets to diversify earnings.
And retail customers are on the radar. First Bank, which accounts for around a tenth of Nigeria’s total banking assets, said in first-half results that 10 percent of its 2.1 trillion naira ($13.2 billion) loan book was to consumers.
Ecobank’s Bodo says the next phase will be consumer lending. “Nigerian banks will have to start consumer lending. Their current lending model is not sustainable at all,” he said. ($1 = 158.55 naira)