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Banks Bring Down Cost-to-income ratios As Industry Margins Tighten

Stock & Analyst Updates	2303 VIEWS
Stock & Analyst Updates
2303 VIEWS

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Wednesday, March 18, 2020/ 08:47PM/ Proshare Research / Header Image Credit: Proshare Research a

As back room discussions continue between banks over mergers and acquisitions, the issues of operating efficiency and cost reduction have become hot button topics. The consequences of the recent Coronavirus outbreak have made the search for efficiency even more pressing as banks review growth strategies for 2020.

Despite the fact that most banks listed on the Nigerian Stock Exchange (NSE) have not released their financial year-end (FYE) 2019 results, interim numbers show that the banks are in a race for costs efficiency as the domestic economy tightens and operating margins get chiselled down.

Information as regards 2019-year end cost-to-income ratio was available for only five (5) banks amongst the thirteen (13) banks listed on the NSE. Seven (7) banks had indicative cost-to-income ratio for Q3 2019 results while Wema Bank had ratios for Q2 2019 (see table 1 below).

Table 1: Banks cost-to-income ratio 2017-2019

SN	Banks	FY 2019	FY 2018	FY 2017
1	GUARANTY	36.11	37.09	38.89
2	ETI	66.4*	61.5	61.8
3	ZENITHBANK	48.8	49.3	52.8
4	STANBIC	50.4	52.9	49.8
5	ACCESS	61.9	62.2	61.9
6	FBNH	71.5*	44.4	39.7
7	FCMB	78.8*	44.6	40.9
8	UBA	60.8*	64	57.8
9	UBN	74.1	79.2	61.5
10	FIDELITYBK	71.7*	71.1	68.6
11	STERLNBANK	82.3*	43.9	71.5
12	UNITYBNK	86*	54.2	27.2
13	WEMABANK	86.03**	87.16	89.9

Source: Banks investors reports, Proshare Research

Data with Asterisk *Are as at Q3 2019

Data with Asterisk **Are as at Q2 2019

The Hard Dash For Cheap Cash

GT Bank and UBN were the two banks that reported the lowest cost-to-income ratio so far for the year ended December 2019, they recorded cost-to-income ratios of 36.11% and 42.6% respectively. While Unity Bank, Sterling Bank and FCMB were the three banks with the highest cost-to-income ratio for Q3 2019 as they reported cost-to-income ratios of 86%, 82.3% and 78.8% respectively (see Table 1 below).

All seven-banks that reported cost-to-income ratio in Q3 had cost-to-income ratios above 60%. This indicates clearly that the majority of banks listed on the NSE recorded high expense costs relative to incomes in the Q3 2019 (see Chart 1 below).

Chart 1: Banks cost-to-income ratio 2017-Q3 2019

Proshare Nigeria Pvt. Ltd.

Source: Banks investors reports, Proshare Research

Over the past three years GT Bank, Zenith Bank, and UBN have consistently reported low CIR relative to other banks, with GT Bank consistently recording the lowest CIR among the three big money centre institutions. GT Bank recorded a decline in its CIR to 36.11% in 2019 from 37.09% in 2018 which was as a result of repricing of time deposits, sustained low cost deposit mix, continuous customer acquisition drive and a retail strategy anchored on focused digital solutions to support a low cost deposit drive.

Zenith Bank recorded a decline in its CIR to 48.8% in 2019 from 49.3% in 2018, part of the strategy it adopted was effective deposit mobilization at the retail end of the market to lend to corporate clients, leveraging the bank's strong digital platform and emerging technologies (see Chart 2 below).

Chart 2: GT Bank and Zenith Bank Cost-to-income ratio 2017-2019

Proshare Nigeria Pvt. Ltd.

Source: Banks investors reports, Proshare Research

Pulling Out The Stops

With the looming Coronavirus pandemic banks will see business volumes collapse as manufacturers and traders alike find their businesses orphaned by low or non-existent demand. The reverberations in the banking halls of the declining economic fortunes in Q2 2020 may become the herald of a new business era. Banks with strategic intent may require a comprehensive cost containment and business growth and recovery plan. They may need to pull out all the stops now.