To provide Investors with clearer insight into how well banks did on a comparative basis in the 9 months to September 2019, a brief summary of comparative data was put together by Proshare and its associate analysts to put context to the three-quarter performances of selected local deposit money institutions.
Total Income Growth; Flat is Beautiful?
Gross earnings for most of the banks were flat in 9 months 2019 compared to the contemporary period of 2018, but total income growth showed marked disparity amongst banks (see table 1 below).
Table 1 Bank Performance Sorted By Comparative Total Income Growth
The Thing About Cost
Cost has become a major concern of Nigerian bank's lately because as gross earnings slow down the best chance of sustaining profitability is by reducing cost, therefore, bank cost- to-income ratios (CIR) are becoming crucial in protecting their bottom lines. Operating expenses are equally a major challenge as banks try to keep net operating income up. In the 9 months to September 2019, GT Bank appears to have been most successful in taming cost as operating expenses fell by -2% on the other hand Access Bank appears to have had the most difficulty with operating expenses in the first three quarters of 2019 as its operating expenses increased by +40%, an explanation for this would be that its merger with Diamond Bank in the course of the period resulted in a temporary spike in expenses as the new bank tried to work out optimal operating levels and establish the most efficient cost structure (see Table 2 below).
Table 2 Bank Performance Sorted By Comparative Operating Expense Growth
Cranking The Profit Machine
Most local Nigerian banks found making profit in 2019 a difficult enterprise as slow economic growth (GDP grew by +1.94% in Q2 2019) and rising expenses (Inflation rate was +11.24% in September 2019) conspired with declining effective consumer demand to put pressure on bank's gross earnings over the first three quarters of the year. Access Bank, nevertheless, leaned against the harsh economic headwinds to pull up profit before tax by +47%, this was impressive given that analysts had earlier thought that the bank would struggle to make profit in 2019 on the back of its merger with Diamond Bank which was known to have warehoused some tricky large delinquent assets. On the flip side, ETI (Ecobank Group) was not so fortunate as pre-tax profit dipped -2%, the slow growth in earnings reflected a cooling of business activities in its Francophone markets and the mild underperformance of its Nigerian operations (see Table 3 below).
Table 3 Bank Performance Sorted By Comparative PBT Growth
Expectedly a soft economy would result in weak lending performances leading banks to record higher non-performing loans (NPLs) in relation to their total loan assets, bank's NPL ratios serve as barometers of measuring how hard the banks and their customers have been hit by adverse business conditions or management governance. In the three quarters to September 2019 Stanbic IBTC posted the lowest NPL ratio of the seven banks reviewed and listed on the Nigeria Stock Exchange (NSE). ETI was one of the hardest hit banking groups as the African continental finance institution saw its NPL settle at 9.9% or higher than the required maximum of 5% stipulated by the Central Bank of Nigeria (CBN). Note should be taken that in the case of ETI, the rules concerning local banking regulations affect only Ecobank Nigeria and not the holding company (ETI). Notably Access Bank had an NPL of 6.3% which was consistent with its absorption of the delinquent assets of the old Diamond Bank Plc (see Table 4 below).
Table 4 Bank Performance Sorted By Comparative NPL Ratio (%)
Back To The Matter of Cost
Banks will have to push down operating costs to achieve decent returns for shareholders in Q4 2019 and the full year 2020. At the heart of operational stability of banks in the coming year will be cost containment and revenue generation from digital platforms. Digital dominance will be a major decider of sustained profitability in the coming months and is being played up in the gradual increase in non-interest income as a proportion of total income of banks. Non-interest income has been growing at a much faster pace than interest income, in Q3 2019 Access Bank (a leader in the bank technology race) saw non-interest income rise by +383% as against interest income growth of +71%. ETI saw interest income fall by -9% but non-interest income rose by +12% (see Table 5 below)
Dragging cost-to-income ratio (CIR) down is a generic strategic move that most banks will adopt going into the new year 2020, but the mere cutting back of operational cost items is only a necessary but not sufficient condition to support long term growth and profitability. The digital playbook has changed the market rules of engagement; banks that will push ahead of the pack are those that lead the consumer experience curve. Banks that are able to make financial service delivery convenient, flexible and cost-effective while preempting consumer needs (as distinct from their wants) will protect both market share and profitability; unfortunately, the laggards may face a very hard time leaning against the compelling winds of consumer expectations. Millennial customers are less patient, less forgiving, and decidedly less loyal than their older counterparts this makes retail service revenue less predictable and therefore riskier in the years ahead. The pace of technology and market evolution for financial services makes the business of banking tough (see diagram 1 below).
Diagram 1 Impact of Technology and Market on Industries
The cost imperative in the 9 months up to September 2019 saw GT Bank lead with the lowest ratio of the selected banks reviewed with a CIR of 37.8% (mirroring the fact that the bank is the most profitable financial franchise in the country per naira of equity capital) while FBN Holdings still has trouble managing costs with a CIR for the 9 moths of 2019 of 71.7%. FBN's figure is a departure from its stated strategic intent which was to move the bank gradually closer to a 60% number and then proceed towards 50% over a 2 to 3-year time-frame.
Zenith Bank has successfully kept its CIR below 50% and retains a leadership position in running a tight operational ship with a CIR of 47.6% as at September 2019. Stanbic IBTC also kept costs in check with a ratio of 50.9% in the first 9 months of the year 2019. UBA, Access Bank and ETI had CIR's above 60% which is adequate but may need to be improved upon to build further operational efficiency (see Table 5 below).
Table 5 Bank Performance Sorted By Comparative CIR
Looking Towards Q4 2019
The outcome for selected banks in Q4 2019 may not be much different than their first 9 months 2019 performance. The difference between the numbers for the banks reviewed would be size rather than direction, the 9 months 2019 statistics give a fair representation of year end expectations for each bank, but it also sets the tone for strategy for 2020.
If the selected banks are to either consolidate or improve the quality of their operating performance their managements must be prepared to do three key things, namely;
The future as near as 2020 will involve the need for strategic shifts that intensify market penetration by way of greater financial inclusion and leveraging Fintech to improve consumer accessibility at lower operating cost. The new financial service consumers made up mainly of individuals between the ages of 18 and 35 are demanding of attention, impatient with time and finicky about service quality; ignoring these baseline requirements would be detrimental to a bank's financial health, the need to reimagine the future is not fairy tale but hardcore business reality, it represents a critical element of the circular loop of business sustainability (see diagram 2 below).
Diagram 2 The New Strategic Imperatives
Birdseye View of Results of Banks in 9 months 2019
The performance of banks in Nigeria in the 9 months to September 2019 was mixed and a representation of the variations in the dynamics of bank business models and legacy challenges in some cases. Analysts remain optimistic that they will all weather the stormy headwinds but some will, obviously, do it more comfortably than others (see Table 6 below).
Table 6 Summary Financial Results of Selected Banks Q3 2019