Public sector rates hike may cut banks’ interest income by 6% – RenCap

Latest report by Renaissance Capital shows that Nigerian banks are facing serious challenges, particular to deliver returns above 20 per cent their cost of capital, arising from the increasingly difficult operating environment, when compared with their peers in Sub-Saharan Africa.

Cash Reserve Ratio (CRR) of 12 and 50 per cent for private and public sector deposits among Nigerian banks respectively, the report said, leading to a blended CRR of about 17 per cent. This, it added, is a far cry from what obtains across the continent, where for example in Kenya CRR is 5.25 per cent; 5 per cent in Rwanda; while for Ghana has 9 per cent.

According to the report titled: “Nigerian banks: The impact of tougher regulation”, Rencap estimates that “the increase in the public-sector CRR to 50 per cent will reduce interest income for the banks by (between) one and six per cent annually.

Following the hike, the report also names Stanbic IBTC and Guaranty Trust Bank as the least vulnerable to this, with exposure to public sector funds at 5 and 8 per cent respectively, compared with a situation where their peers are in the 10 to 16 per cent range.

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“We note that commission-on-turnover (CoT) fees were fairly significant contributors to non-interest revenue (NIR) in full-year 2012, especially for the larger banks. At full-year 2012, Commission on turnover contributed 40 per cent to Non-Interest Revenue for Zenith and First Bank, and 12 and 10 per cent to total income, respectively. The least affected of the Tier 1s in FY12 was Access at 14 per cent of NIR and 5 per cent of total income.

“Of the Tier 2 banks, Diamond, First City Monument Bank (FCMB) and Skye were the most affected, while Stanbic IBTC and Fidelity were the least,” Rencap added.

In terms of returns however, authors of the report say the “bigger banks are better positioned to weather the headwinds, given larger balance sheets and better economies of scale.”

Consequently, Rencap announced the upgrade of First Bank, a Tier 1 operator to ‘buy’ from ‘hold,’ with a target price of N20.5 per share (unchanged), stressing that “given the potential upside, (it) is now our top pick among the Tier 1 banks. We maintain our ‘buy’ ratings on Zenith Bank with a N25.3/share TP (unchanged) and United Bank for Africa at N9.2/share (from the previous N8.4/share).

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“In our view, GTB is still the best in class by a good margin, we believe its premium rating is justified and we maintain our BUY rating with a TP of N29.1/share (unchanged). We maintain our hold rating and N12.5/share TP on Access Bank. We believe this will remain a challenging year for Access given the nature of its balance sheet (large exposure to illiquid AMCON bonds). We think 2014 should be a year of stronger growth for Access, as most of the AMCON debt matures at the end of this year and will be redeemed for either cash or treasury bills, given Access opportunity to earn better returns on its assets.

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