Wednesday, September 26, 2018 05.40PM / Temitope Babalola, Research Desk
Financial intermediation in any economy is largely impossible without any sound financial system. Moreover, with the back dialing in the cycle, analyzing and taking an in-depth look into the financial performance of banks have become inevitable.
Thus, this edition of the Proshare Confidential looks at the performance of Deposit Money Banks (DMB’s) for the first half of 2018. Amongst many indicators that came to light, the study discovered the growing dominance of corporate banking (product wise) and we also highlighted the growing size of ‘the Treasury’.
The study showed an aggressive mobilization to recover loans on the part of DMBs as they churned up N1,385 billion in total interest income and N1,1278 billion in total operating income; which is 1.19% and 1.09% of 2017 Gross Domestic Product respectively.
It appears that there is a persistent tilt towards income from government securities from the DMB’s either as a direct attempt to hedge against the possible dip in interest income on loans or as a viable investment option given the economic realities.
Most DMB’s are preoccupied with reducing loan assets and increasing the hold of treasury bills. This improves the amount of liquid assets on the one hand and also improves their loan to deposit ratio, as most DMB’s went to work to clean up their balance sheet.
The recovery in oil prices coupled with the ability to veer off the real economy has led to a diminishing in non-performing loans. Therefore, they have been an improvement in the micro prudential levels of the bank.
There current policy response to macro-economic dynamics have forced DMB’s to resort to replenishments strategies - locking into short term maturity, especially risk-free instruments. This is largely reflected in their cash flow statement(s), showing an improved pool of marketable asset; which reduces the room of mismatch of risk.
The report showed a strong correlation between low interest deposit expense and cost to income ratio, banks with relatively low interest deposit expense ratio have low cost to income ratio. Thus, banks with relatively low cost of borrowed fund tend to have a low cost to income ratio.
This would perhaps be the clearest justification for the cautious attitude of DMB’s to the real sector which remain a headwind to private investment. It also hints to the fencing of financial intermediation, especially to the informal sector.
The report highlighted the softening in the interbank call rate as the election cycle draws closer, underlining the rising liquidity, thereby, forcing DMB’s to resort to indirect tools to manage the rising liquidity.
As a follow through, the report also commented on the CBN’s intention to use its base money to create a scaffold for growth and reduce unemployment moving forward.
Previous Proshare Confidential Report (s)
1. AMCON and Financial Services Debt Burden in Nigeria – Jul 2018
2. Poverty Tracker and Nigeria: Raising The Red Flag – Jun 2018
3. POCKET Economics: Addressing Income Inequality – May 2018
5. Judging IMF’s Position on Development Indices – Mar 2018
6. Money Market: The Folk Road – Feb 2018
10. States and the Rising Weight of Debt – Oct 2017
11. Money Supply: Reeling from Policy Response – Sep 2017
13. Too Big Government: The Hysteria of Developmental Quagmire – Jul 2017
15. Article IV vs. ERGP - The Third Way – May 2017
16. Lifting The Veil off The Financial Sector – Apr 2017