FG’s 2018 T-Bill policy  may hurt Nigerian banks profits–Fitch

Fitch Rating Agency has said that Nigerian banks may find it more difficult to sustain profitability given the decline in net treasury bill (T-bill) issuance in Nigeria’s first quarter of 2018 issuance programme. The slowdown in T-bill issuance marks a change of strategy by the federal government as it plans to increase its financing from external sources and longer-dated domestic issuances.

The Rating Agency said “Record T-bill issuance in 2017 helped support the Central Bank of Nigeria’s strategy to maintain naira exchange-rate stability. High yields on T-bills issued in 2017 around 13%-14% on 90-day T-bills, attracted investors and helped to support the naira. An increase in oil export earnings and the introduction in April 2017 of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism, commonly referred to as the “Investors and Exporters’ FX Window”, also helped naira stabilisation during the second half of 2017.

“Nigerian banks are highly reliant on net interest income for profitability and T-bills proved to be an important source of profits in 2017. Interest on securities represented 30 per cent of total gross interest earned in the nine months of 2017, averaged across Nigerian banks rated by Fitch.

“September 2017, government securities including T-bills represented more than 15 per cent of the banks’ assets as new lending fell, reflecting weak credit demand, tighter underwriting standards and banks’ reluctance to extend new loans as they focused on extensive restructuring of troubled oil-related and other portfolios. Even the country’s largest banks cut back on new lending, with Guaranty Trust Bank’s stock of outstanding loans falling 10 per cent during the period, FBN Holdings’ by 4.6 per cent, Zenith’s by 3.7 per cent and Access’s by 1.1 per cent. United Bank for Africa’s loan book grew 5.6 per cent, but this is likely to have been driven by non-Nigerian lending as the bank operates in 22 other African countries.

“We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018. The CBN’s latest issuance schedule shows N1.1 trillion of rollovers in first three months of 2018 against N1.3 trillion of maturing bills. In 2017, rollovers fully covered maturing bills. Performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains and rising loan impairment charges, but the largest banks are best placed to withstand these challenges. Operating returns are still strong at GTB (9M17 operating return on average equity (ROAE): 37%), Zenith (28%), UBA (22%) and Access (20%), while FBNH’s operating ROAE is lower (12%) but improving.

“ However, some second-tier banks with a 9M17 operating ROAE of 4%-6% may struggle to remain profitable in 2018. We highlighted falling profitability for Nigerian banks in our 2018 Outlook report for sub-Saharan banks, available by clicking on the link below. Our 2018 rating outlook for the Nigerian banking sector is negative, reflecting continued fragility in the operating environment and the Negative Outlook on the sovereign’s ‘B+’ rating.”