- Q1 net interest more than triple on CBN’s rate hikes
The Monetary Policy Committee of the Central Bank of Nigeria at its last sitting in early March 2024 increased lending cost otherwise known as Monetary Policy Rate by 200 basis points from 22.75 percent to 24.75 percent. Analysis of financial reports of five banks confirms the positive relationship between the increase in MPR and bank’s earnings, FESTUS OKOROMADU reports.
Despite the wailing in Nigeria over economic hardships being experienced due to rising inflation rates and other economic factors, the banking industry is enjoying an era of boom performance as analysis of financial results of players in the first quarters of 2024 reveals.
A review of results of five financial institutions listed on Nigeria Exchange Limited, namely, Access Holdings Plc, Zenith Bank Plc, Guaranty Trust Holding Company Plc, United Bank for Africa (Plc) and Stanbic IBTC (Plc) shows that interest income, which is a measure of earnings generated from the core banking business of interest accruable from lending funds to customers grew by 112.52 percent to over N2.04 trillion in the first quarter (Q1) of 2024 as against N962.92 billion report by the banks in the corresponding period of 2023.
Net interest income is the difference between the interest a bank earns and the interest it pays out to customers.
“Banks’ net-interest income, which is the core income from loans and advances to customers, investment securities and cash and cash balances, are mostly driven by interest rate hikes,” a banking analyst at Cordros Securities Limited, Tesleemah Lateef, said.
“A loan is given to customers backed by the interest rate during the period. At the current interest rate, it is expected that banks reprice assets to increase the rate to be more beneficial to them,” she added.
“The expansion of foreign loans is enough to record a significant growth. Banks are not giving out loans because of the economic situation. They are very conservative so they are giving to only cash generative businesses”
The Central Bank of Nigeria in March raised its monetary policy rate for the second straight time by 200 basis points to 24.75 percent in a bid to fight inflation. In February, the CBN increased the interest rate by 400 basis points to 22.75 percent.
Before the rate was hiked to 24.75 percent, the apex bank had increased it by 750 basis points to 18.75 percent last July from 11.25 percent in March 2022.
Apart from the MPR hike, the liberalisation of the foreign exchange regime in June weakened the naira from N463.38/$ to N 1459.7/$ as of May 9, 2024. At the parallel market, the naira is being traded at around 1,422.5/$ as against 762/$ before the FX reform.
Access Holdings Plc
During the period under review, the Access Holding Group’s interest income grew by 183.1 percent to N719.60 billion from N254.22 billion in Q1, 2023, as all major contributory lines recorded increases. Investment securities rose by 255.4 percent to N321.50 billion from N90.47 billion, loans and advances to customers by 125.2 percent year-on-year to N335.84 billion from N149.10 billion, loans and advances to banks grew by 292.4 percent y-o-y while and cash and bank balances with banks soared by 478.0 percent y-o-y.
Experts have attributed the higher core income performance to growth in investment securities, having a year-to-date (YTD) value of 142.5 percent growth y-o-y to N8.52 trillion and elevated interest rates in the fixed-income market.
Similarly, the group’s non-interest income advanced by 47.9 percent y-o-y to N229.12 billion, primarily driven by FX revaluation gains growth of 91.1 percent y-o-y) and net fees & commissions income up by 91.4 percent y-o-y outweighing the losses on investment securities which grew by 13.3x y-o-y to N95.76 billion), triggered by the loss on non-hedging derivatives at N288.50 billion as against N26.90 billion in Q1, 2023 amid gains on equity investments at N111.98 billion, a remarkable achievement against a portfolio that recorded zero income in Q1, 2023.
In the area of operating expenses, the group reported a growth of 86.5 percent y/y to NGN279.31 billion, due to the combined impact of higher regulatory costs and inflationary pressures in the review period. The group incurred higher costs on personnel expenses up by 137.9 percent y-o-y, AMCON levy up by 68.4 percent y-o-y, NDIC premium rose by 27.2 percent y-o-y and other expenses grew by 75.6 percent y-o-y.
The bottom-line look good as the Holdco recorded a profit before tax growth of 148.0 percent y-o-y to N202.74 billion and eventually, delivered growth of 121.8 percent y-o-y growth in profit-after-tax to N159.29 billion, amid the higher income tax expense of 337.2 percent y-o-y in the period.
As for shareholders, the performance is promising as it reveals a stellar diluted EPS growth of 118.6 percent y-0-y to N4.35 as against N1.99 in the comparative period of 2023.
Guaranty Trust Holding Company Plc (GTCO)
GTCO’s interest income for the first quarter of the 2024 financial year advanced by 170.6 percent y-o-y to N281.65 billion from N104.08 billion in Q1, 2023, boosted by higher income from loans and advances to customers up by 91.0 percent to N122.04 billion compared with N63.59 billion in similar period of 2023.
Similarly, investment securities rose by 307.5 percent y-o-y to N112.90 billion, while cash and balances with banks appreciated by 265.9 percent y-o-y to N46.71 billion.
The Holdco’s earning asset increased by 104.3 percent YTD to N10.18 trillion as the high yielding environment also supported growth in core income.
Sequentially, interest expense rose by 147.9 percent y-o-y to N54.35 billion, primarily driven by the higher interest paid on customer deposits which rose by 141.0 percent y-o-y as the group’s deposits surged to N9.20 trillion, translating to YTD growth of 87.3 percent.
GTCO witnessed a remarkable 666.4 percent y-o-y increase in its non-interest income to N394.86 billion, majorly driven by the N331.55 billion fair value gain recorded for the Holdco’s financial instruments as against loss of N99.00 million in the corresponding period of 2023 as income from net fees and commission advanced by 74.5 percent y-o-y and FX trading also increased by 48.9 percent y-o-y.
Operating expenses (OPEX) grew by 76.9 percent y-o-y to N99.33 billion following the higher personnel expenses growth of 114.4 percent y-o-y to N22.28 billion and regulatory fees including AMCON levy up by 33.7 percent y-o-y to N18.34 billion and deposit insurance premium rose by 48.5 percent y-o-y to N6.28 billion. Given that operating income grew by 367.4 percent y-o-y, faster than OPEX, the group’s operational efficiency improved significantly as its cost-to-income ratio (ex-LLE) settled at 16.3 percent down from 43.1 percent in Q1, 2023.
GTCO’s profitability was stronger, with profit-before-tax settling 587.5 percent higher year-on-year to N509.35 billion. After accounting for a higher income tax charge of N52.21 billion translating to 227.9 percent y-o-y, PAT settled at N457.13 billion, 685.9 percent improvement on N58.17 billion reported in the similar period of 2023.
Returns on investment recorded a whopping 696.1 percent growth as EPS rose to N16.24 for the period under review compared with N2.04 in the similar period of 2023. Financial analyst insists that the impressive growth in the Holdco’s earnings was driven primarily by the fair value gain on the group’s financial instruments to N331.55 billion from loss of N99.00 million in Q1, 2023, coupled with expansion in its funded income line which grew by 170.6 percent y-o-y.
United Bank for Africa Plc
Interest income by the UBA Group in the period under review rose by 129.7 percent y-o-y to N440.76 billion from N191.68 billion. The growth was driven mostly by the group’s investment income which increased by 147.1 percent y-o-y to N201.03 billion.
In nominal terms, the group also earned higher interest from its loans and advances to customers of N195.31 billion representing a 103.3 percent increase y-o-y and cash and bank balances which grew by 267.2 percent y-o-y to N40.53 billion from N11.04 billion.
Remarkably, the growth across these income lines were induced by a combination of the rise in the group’s interest-earning assets which rose by 71.6 percent YTD to N15.98 trillion and higher yields in the fixed income market.
UBA recorded a 93.9 percent y-o-y growth in interest expense to N140.09 billion due to the higher cost incurred on deposits from customers up by 71.1 percent y-o-y, deposits from financial institutions rose by 138.7 percent y-o-y and borrowings which grew by 149.2 percent y-o-y.
The higher interest paid on deposits from customers is attributed to the increase in customers’ deposits up by 112.6 percent YTD to N18.38 trillion amid an improvement in its CASA mix at 87.0 percent in Q1, 2024 as against 84.0 percent in Q1, 2023. Consequent to the faster pace of growth in interest income relative to interest expenses, the group recorded an expansion in net interest income by 151.3 percent y-o-y.
Further down, non-interest income advanced by 38.9 percent y-o-y to N77.91 billion, supported by good expansions in net fees and commission income which grew by 114.6 percent y-o-y and net FX trading income up by 95.8 percent y-o-y. Consequently, operating income settled higher by 122.5 percent y-o-y to N373.31 billion.
Operating expenses in Q1, 2024 also notched higher by 104.1 percent y-o-y, triggered by expansions in employee benefits, regulatory costs and sticky inflationary pressures. The group recorded higher costs from personnel expenses grew by 112.1 percent y-o-y N66.31 billion from N31.26 billion, fuel, repairs and maintenance cost grew by 136.5 percent y-o-y, AMCON levy rose by 75.5 percent y/y and NDIC premium also grew by 111.4 percent y-o-y) during the period.
Bottom-line remained strong as profit-before-tax grew by 154.7 percent y-o-y to N156.34 billion. The group recorded N142.58 billion as profit-after-tax, translating to a 166.1 percent y-o-y growth, amid the higher income tax expense of N13.76 billion or 76.8 percent y-o-y increase.
In terms of prospects for shareholders, the UBA Holdco recorded a significant 169.4 percent year-on-year growth in EPS to N3.96 in Q1, 2024 as against N1.47 posted in Q1, 2023. The expansion in the group’s EPS was underpinned by the remarkable expansion in funded income which grew by 129.7 percent y-o-y, just as non-funded income also grew by 38.9 percent y-o-y in Q1, 2024.
Zenith Bank Plc
Interest income of Zenith Bank Plc surged by 154.9 percent y-o-y to N488.55 billion, underpinned by the higher income from loans and advances to customers up by 142.6 percent y-o-y to N300.51 billion and investment securities advanced by 176.0 percent y-o-y to N154.20 billion.
The growth in interest income is attributable to the increase in the bank’s earnings assets which increased by 86.5 percent y-o-y to N18.50 trillion amid the elevated interest rate environment and yields in the fixed-income market.
The bank’s interest expense rose by 157.0 percent y-o-y to N182.10 billion, despite the 175bps moderation in the bank’s cost-of-funding (CoF) to 0.9 percent in Q1, 2024 from 2.7 percent in Q1, 2023) During the period, the Bank incurred higher interest costs across deposits from customers rose 187.1 percent y-o-y and other borrowings went up by 02.8 percent y-o-y, reflecting the higher interest rate environment. Accordingly, net interest income settled higher by 273.3 percent y-o-y at N271.57 billion.
Similarly, non-interest income (NII) spiked by 273.3 percent y-o-y to N271.57 billion in Q1, 2024. The growth in NII is attributed mainly to the expansions in net gains on investment securities up by 521.7 percent y-o-y amid a rise in net fees and commissions income which increased by 69.0 percent y-o-y and FX revaluation gains which rose by 176.9 percent y-o-y. This expansion in NII, alongside the growth in net interest income, led to a 181.0 percent y-o-y increase in operating income to N522.05 billion.
Operating expenses grew by 103.5 percent y-o-y to N201.85 billion, with the most pressure exerted by NDIC premium up by 604.8 percent y-o-y, personnel expenses advanced by 85.0 percent y-o-y, while licenses, registrations, and subscriptions soared by 932.7 percent y-o-y and fuel and maintenance charges leaped by 198.4 percent y-o-y. Interestingly, the bank’s AMCON levy declined by 70.4 percent y-o-y in the period under review.
Zenith Bank’s profit-before-tax in Q1, 2024 increased by 269.7 percent y-o-y to N320.19 billion with income tax charge in the period advancing by 200.4 percent y-o-y. Subsequently, PAT settled 291.4 percent higher to N258.34 billion.
As per shareholders return, the bank’s EPS in Q1, 2024 settled at N8.22 representing 291.4 percent growth y-o-y compared to N2.10 in Q1, 2023, the growth was driven mainly by increased core income which advanced by 154.9 percent y-o-y, while non-core income also grew by 273.3 percent y-o-y.
Stanbic IBTC Holdings Plc
Stanbic IBTC Holdings also had its fair share of interest income growth in the first quarter of the year as it posted N115.80 billion representing a 129.7 percent y-o-y increase. Primarily the growth was achieved on a 119.8 percent y-o-y increase in interest earned on loans to customers, following a 6.5 percent YTD growth in Net loans and advances to customers.
Also contributing to the growth in interest income was interest earned on Investment securities which surged by 154.9 percent y-o-y. Interest expense rose by 177.1 percent y-o-y on the back of substantial increases in interest paid on long-term borrowings up by 152.1 percent y-o-y and customer deposits rose by 159.5 percent y-o-y.
Banks enjoying both loans and investment securities – Experts
Analysts said that the spike in the commercial banks’ earnings was largely fueled by the growth in interest income, driven by effective asset repricing in response to the elevated interest rate environment.
Interest income or revenues are payments that the bank receives from its interest-bearing assets.
“The banks’ main business is lending and for them to lend money out they charge a fee which is the interest funds they give. A hike in interest rate can result in a repricing of the asset. Lending is their core business, but they have to reprice their assets, which will continue if interest rates remain high”
“The increase in interest income was the major driver for most of the banks’ profit. If you check their loan books for 2023, it expanded significantly, also year to date we are seeing very significant expansion in loan books,” sub-saharan banking research analyst at Vetiva Capital Management, Olumide Sole, said.
He said the drivers of the loan books expansion are more of translation not because banks are giving out loans and that the loans especially the foreign ones will continue to expand as the naira depreciates.
“The expansion of foreign loans is enough to record a significant growth. Banks are not giving out loans because of the economic situation. They are very conservative so they are giving to only cash generative businesses,” he added.
Further analysis of the statements revealed that the banks’ total interest income was N2.40 trillion in Q1, up from N977.4 billion while loans and advances to customers grew by 108.7 percent to N1298.1 trillion from N617.6 billion.
“The banks’ main business is lending and for them to lend money out they charge a fee which is the interest funds they give. A hike in interest rate can result in a repricing of the asset. Lending is their core business, but they have to reprice their assets, which will continue if interest rates remain high,” investment analyst at Chapel Hill Denham, Nabila Mohammed, said.
She said the banks are enjoying both loans and investment securities because yields in the market are attractive for entry-level and that it was clear at the beginning of the year that the CBN would hike interest rates.
“But the winners will be those that can manage their interest expenses well because the banks can’t be repricing their assets and not rewarding their depositors. The banks should be able to manage their cost of funds by making sure that they have a low-cost deposit mix.”
