Staff Writer
There are signs that banks are making significant profits from the rising interest rate environment brought on by the Central Bank of Nigeria’s (CBN) interest rate regime that targets inflation.
under an environment of high interest rates, in earnings windfall
Results from some of the top banks’ first quarter of 2023, or Q1’23, already trend in this direction as their earnings from lending activities increased Year-on-Year (YoY) by 46.02 percent during the period.
This sudden increase came after their lending rates were marked up in reaction to the CBN’s gradual increase in the benchmark interest rate, the Monetary Policy Rate (MPR).
The CBN began raising interest rates in the third quarter of 2022 in an effort to curb inflationary pressure. This effort culminated in the MPR rising to 18.5 percent as of May 24, 2023, marking the third increase this year.
Additionally, since the monetary policy rate was introduced in 2006, the development caused borrowing costs to record-high climb to their greatest level ever.
As a result, manufacturers complain that their operations are constrained by high funding costs, while banks enjoy robust profits, adding to the real sector of the economy’s problems.
According to the banks’ financial filings, they earned N1.39 trillion in interest on loans during the review period, a 46.02 percent rise from N954.1 billion in Q1’22.
These financial institutions include Access Holdings Plc, Stanbic IBTC Holdings Plc, Guaranty Trust Holding Company (GTCo) Plc, United Bank for Africa (UBA) Plc, FBN Holdings Plc, Fidelity Bank Plc, Unity Bank Plc, Ecobank Transnational Incorporated (ETI) Plc, Union Bank of Nigeria Plc, Wema Bank Plc, Zenith Bank Plc, and FCMB Group Plc.
Remember that Financial Vanguard was the first to reveal exclusively that rising interest rates are now suffocating businesses, as finance expenses for 30 companies it had previously studied rose by 19.9 percent to N79.34 billion in Q1 23 from N66.17 billion in the same period in 2022, proving this point.
Even though the banks reported growth in their loan book, a breakdown of their interest income revealed that lending profits increased more quickly than their loan portfolio.
The banks’ loan book for the quarter increased by 18.7% to N29.47 trillion from N24.84 trillion in Q1’22, a growth margin of interest income that was 27.32 percentage points weaker.
Investment analysts worry that the steadily rising interest rates charged by banks may result in a rise in non-performing loans (NPLs), as borrowers may find it more difficult to make their loan payments.
They believed that the pattern hurts Nigeria’s ability to compete internationally and makes imports more desirable than exports.
earnings from lending activity at banks
The largest increase in interest income was recorded by FBN Holdings Plc, whose earnings from lending activities increased by 64.1 percent to N179.61 billion from N109.45 billion in Q1’22. In the meantime, its loan book increased to N3.95 trillion in Q1 23 from N3.06 trillion in Q1 2022, a growth of 29.1%.
Following closely behind with a 15.8% growth in loan volume, UBA had a 53.41 increase in interest income to N191.88 billion from N125.08 billion in 2022.
Stanbic IBTC Holdings Plc came in third, increasing by 52.8% from N33 billion in 2022 to N50.42 billion. The bank’s loan book increased by 22.45% from N980 billion in the same period in 2022 to N1.2 trillion.
Following closely after was Zenith Bank, whose loan book expanded by 13.5 percent to N4.03 trillion during the first quarter of 23 and saw a gain in interest income of 51.6% to N191.63 billion from N126.38 billion.
Other companies include Access Holdings Plc, which increased by 46.31 percent to N254.12 billion, GTCO Plc (43.63%), Fidelity Bank (42.5%), FCMB Group (41.4%), Wema Bank (35.4%), and Ecobank (32.7%), in that order.
Unity Bank reported an 11.1 percent increase in interest income to N10.58 billion from N9.52 billion in the same period in 2022, while being the only bank whose loan book shrank (-34.9%) during the period.
increases import dependence and the risk of NPL expansion, according to experts
According to David Adonri, Vice Chairman of Highcap Securities, a high interest rate environment keeps Nigeria dependent on imports since it makes domestic production and exports less competitive.
“Interest rates have continued to rise in the economy as a result of the contractionary monetary policy of the CBN since 2022,” he said. By raising the cost of loan, banks have passed this rate increase forward to their clients.
The yield on public debt, to which banks are the largest subscribers, has also increased as a result of rising interest rates. All of these have made it easier for banks to earn interest, which has increased dramatically by 46.02% in just one year.
“While banks are rejoicing in the windfall, borrowers and consumers are wailing due to the rising cost of living and inflation brought on by the high cost of capital.
“As a result of trade liberalization and globalization, Nigerian goods and services are less competitive abroad, causing imports to be more affordable than exports. This keeps Nigeria dependent on imports and undermines its ability to create profitable jobs.
According to Victor Chiazor, Head of Research and Investment at FSL Securities, “The combined growth of 46.02% in interest income reported by the banks for the first quarter of 2023 was largely due to the high interest rate environment, which was triggered by the Nigerian central bank’s desire to stop the rising inflation rate by increasing its monetary policy rate.
“The high interest rate environment enhanced the banks’ interest revenue earnings, but on the other hand, it also raised the banks’ interest expenses as clients expected higher returns for both their deposits and other investments with the banks.
We also noted that when the banks’ income margins improved over the course of the time, their net interest income increased.
“The high interest rate environment would reduce demand for new loans while also potentially increasing non-performing loans and bank impairment as borrowers struggle to repay such loans due to the high interest component,” according to the study.
“As you are aware, the CBN kept increasing MPR after every MPC sitting, giving banks the opportunity to increase the interest charge on the given loans,” said Mallam Garba Kurfi, Managing Director/CEO of APT Securities and Fund. This enhanced their return on the loans they had already received.
