Banking Sector Update-Suspension of International Card services to affect E-banking revenue in Q4'16

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Monday, October 17, 2016/ 5.38pm /CardinalStone Research

Last week, Nigerian banks suspended their international card services following CBN's directive that all banks (except First Bank) should sell dollar remittances from Nigerians in the diaspora only to Travelex.

Given that e-banking revenues from international card transactions have provided strong support for the non-interest revenue of banks, please see below our analysis of the impact of this development on banks' performance

Cards/E-banking Revenue on average accounts for 7% of total revenue

Card revenue for the banks in our coverage universe grew by  an average of  88% between  FY'15 and  H1'16 (annualized) respectively.

The significant jump between FY'15 and H1'16 as we gathered was partly as a result of an informal agreement between the CBN and banks to set card rate close to parallel market rate so as to discourage FX round tripping and speculations.

Card transactions are typically settled by Nigerian banks at a rate that is substantially higher than the interbank rate (spread to interbank rate is about 55% on average).

With this many banks saw a substantial improvement in non-interest income despite the lack of liquidity in the interbank FX market.

E-banking Revenue (N'millions)


E-banking Revenue Growth

 



Impact of the suspension of the International card on revenue and profitability 
We expect a significant reduction in the contribution of card revenues to non-interest income in Q4 if the suspension of card transactions persist.


However, the impact on FY revenue would be minimal since only Q4 card revenues will be affected.


On our previous FY'16  e-banking revenue estimate of N157.8 billion for the banks in our coverage,  we estimate a 12% reduction across board.


Access bank and UBA will likely be the most affected as e-banking revenues account for 10.8% and 10.9% of gross earnings for the two banks - the highest in the industry.


Final thoughts
Despite expected reduction in e-banking revenue (8.4% of gross earnings) of Guaranty, the bank remains our top pick as we anticipate considerable revaluation gains and an outperformance of the management's earnings guidance.


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