High interest rates: Banks in earnings windfall

There are indications that banks are reaping huge returns from the rising interest rate environment following Central Bank of Nigeria, CBN, inflation targeting interest rate regime.

Already the first quarter 2023, Q1’23, results of some of the leading banks are pointing in this direction as their earnings from lending activities rose Year-on-Year (YoY) by 46.02 percent during the period.

This sharp rise followed a mark-up in their lending rates in response to a steady upward adjustment in the benchmark interest rate, Monetary Policy Rate (MPR) by the CBN.

In its bid to check inflationary pressure, the CBN had started interest rate hike in the third quarter of 2022, which culminated to a rise in the MPR to 18.5 percent as at May 24, 2023, a third-consecutive hike this year.

The development also resulted in a record rise in borrowing cost to its highest since the monetary policy rate was adopted in 2006.

This also contributes to the headaches of the real sector of the economy as manufacturers complain of their operations being shackled by high cost of funding while banks rake in strong earnings.

Financial statements of the banks for the review period showed that the banks raked in N1.39 trillion as interest on loans, a 46.02 percent increase compared to N954.1 billion in Q1’22.

The banks are 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.

Recall that Financial Vanguard had exclusively reported that the rising interest rate is now choking companies as funding costs for 30 companies previously analysed by Financial Vanguard spiked by 19.9 percent to N79.34 billion in Q1’23 as against N66.17 billion in the corresponding period in 2022.

A breakdown of the banks interest income showed that though the banks recorded growth in their loan book, earnings from lending rose faster than the loan portfolio.

The banks’ loan book for the period grew by 18.7 percent to N29.47 trillion from N24.84 trillion in Q1’22, a 27.32 percentage point slower than the growth margin in interest income.

However, investment analysts fear that the steady increase in banks lending rates may trigger an increase in Non-Performing Loans (NPLs) as customers may now struggle to repay the loans.

They opined that the trend puts Nigeria’s manufactured goods and services at competitive disadvantage, making imports more attractive than exports.

Banks’ earnings from lending activities

FBN Holdings Plc recorded the highest increase in its interest income as its earnings from lending activities jumped by 64.1 percent to N179.61 billion from N109.45 billion in Q1’22. Meanwhile, its loan book grew by 29.1 percent to N3.95 trillion in Q1’23 from N3.06 trillion in the corresponding period in 2022.

UBA, which grew its loan book by 15.8 percent, followed, recording a 53.41 percent increase in its interest income to N191.88 billion from N125.08 billion in 2022.

Stanbic IBTC Holdings Plc was the third with 52.8 percent increase to N50.42 billion from N33 billion in 2022. The bank’s loan book grew by 22.45 percent to N1.2 trillion from N980 billion in the corresponding period in 2022.

Zenith Bank followed with a 51.6 percent increase in its interest income to N191.63 billion in Q1’23 from N126.38 billion, while its loan book grew by 13.5 percent to N4.03 trillion.

Others are Access Holdings Plc with 46.31 percent increase to N254.12 billion; GTCO Plc (43.63% to N82.52bn); Fidelity Bank (42.5% to N86.003bn); FCMB Group (41.4% to N66.04bn); Wema Bank (35.4% to N33.88bn) and Ecobank (32.7% to N207.22bn).

Unity Bank, the only bank whose loan book shrinked (-34.9%) during the period, posted an 11.1 percent increase in its interest income to N10.58 billion from N9.52 billion in the corresponding period in 2022.

Perpetuates import dependence, may trigger NPLs growth – Experts

In his views, David Adonri, Vice Chairman, Highcap Securities, said that high interest rate environment perpetuates Nigeria’s dependence on importation as rising interest rate makes local manufacturing and exports uncompetitive.

He stated: “As a result of the contractionary monetary policy of CBN since 2022, interest rates have continued to increase in the economy. Banks have transferred this rate hike to their customers by increasing the cost of credit.

“Rising interest rates have also increased the yield on public debt to which banks are the highest subscribers. All these have facilitated the banks’ interest income which has risen remarkably by 46.02% within one year.

“While banks are enjoying the bonanza, borrowers and consumers are groaning under the escalating cost of doing business and rising inflation attendant to high cost of funds.

“With globalization and liberalization of trade, rising cost of funds put Nigerian produced goods and services at a competitive disadvantage internationally, making imports to be cheaper than export. This perpetuates import dependence and erodes productive employment in Nigeria.”

Victor Chiazor, Head Research and investment at FSL Securities, said: “The combined growth of 46.02% in interest income reported by the banks for the first quarter of 2023 was largely as a result of the high interest rate environment which was triggered by the Nigerian central bank’s desire to halt the rising inflation rate by increasing its monetary policy rate.

“The high interest rate environment increased the banks earnings on interest income, but, on the flip side, also increased the banks interest expense as customers demanded more returns for both their deposits and placements with the banks.

“We also observed that the banks’ net interest income grew during the period as their income margins improved during the period.

“The high interest rate environment would reduce the demand for new loans while we may also see increased non-performing loans and impairment by the banks as consumers struggle to repay such loans due to the high interest element.”

Mallam Garba Kurfi, Managing Director/CEO, APT Securities and Fund, said: “As you are aware, the CBN kept increasing MPR after every MPC sitting, which gives banks the opportunity to increase the interest charge on the given loans. That increased their income on the already given loans.”



FI