The banking sector would have recorded an ROE of 31.6% without the aggressive implementation of the cash reserve policy in 2020 – Nairametrics

Agusto & Co. Limited, Nigeria’s largest research house and rating institution recently released its flagship product Banking Sector Report 2021, which is the most recent and comprehensive report on the banking sector in Nigeria based on a review of the financial statements of twenty commercial banks and five investment banks. The report examined the structure of the industry, the financial situation, the regulatory environment in addition to the macroeconomic environment and its impact on the Nigerian banking industry.

According to Agusto & Co’s Bank report, the COVID-19 pandemic has caused an extraordinary test for the global community. Although the global death rate from COVID is low, at around 2.2%, the death toll has fallen from less than 3,000 in December 2019 to around 3.9 million as of June 30, 2021. The death rate in Nigeria was comparatively lower at around 1% on the same date. However, the local economy has had its fair share of adversities related to the pandemic. However, drawing lessons from the economic recession of 2016/2017, the Nigerian banking sector was better prepared in 2020. Proactive measures in the form of a forbearance granted by the Central Bank of Nigeria (CBN), allowed banks to proceed. a temporary and time-limited restructuring of the facilities granted to households and businesses severely affected by COVID-19. Overall, the lending approach has been cautious in the industry given the difficult operating environment. Although gross loans and advances increased by 12%, loan growth was negative when considering the 19.3% devaluation of the naira. Supported by abstention and the proactive measures adopted by the banks, the NPL ratio improved to 6.6% (FY 2019: 7.6%).

The reliability of the business continuity measures was tested in 2020, given the movement restrictions that lasted for months. Most banks have shown resilience through innovative measures, including remote working arrangements and upgrading network infrastructure to support more traffic on digital channels. These arrangements also provided support during the mandatory curfew caused by the civic unrest that followed the #EndSARS protests in October 2020. Indeed, the pandemic has highlighted the crucial role of technology in deepening financial services, with some banks experiencing up to 50% increase in digital banking transaction volumes. However, Agusto & Cie notes that these gains were limited by the reduction in bank fees induced by the CBN, which came into effect in January 2020. As a result, electronic banking revenues decreased by 27.3%, which represents a decrease of 13, 2% (fiscal year 2019: 21.1%) of -Interest income.

CBN policies to lower interest rates have persisted, especially given the urgent need to stimulate the economy in the wake of adversities created by the pandemic. However, given the need to moderate inflation amid efforts to maintain a stable exchange rate, the cash reserve requirement (CRR) was increased and normalized to 27.5% for investment banks. and commercial. The standardized CRR has been implemented alongside discretionary deductions. Agusto & Cie Notes that at the end of fiscal 2020, the industry’s restricted cash reserves exceeded 9.5 trillion yen, resulting in an effective CRR of 37%. It should be noted that Nigeria has the highest reserve requirements in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRRs below 10%. We believe that the high level of CRR moderated the performance and liquidity position of the sector during the year under review. Assuming the sterile CRRs were invested in 5% Treasury securities, 482 billion yen would have been added to the industry’s pre-tax profit. This would have increased the industry’s return on average equity (ROE) from 11% to 31.6% in the fiscal year ended December 31, 2020.

Table 3: Impact of restricted funds (CRR) on the profitability of the banking sector in fiscal year 2020

Cash reserve requirement Estimated interest income lost assuming a yield of 5%
Zenith Bank Plc 1,370,619,000 68 530 950
Access Bank Plc 1,275,279,265 63 763 963
First Bank of Nigeria Ltd 1,230,974,871 61 548 744
United Bank for Africa Plc 1,072,094,000 53 604 700
Guarantee Trust Bank Plc 1 008 748 051 50 437 403
Fidelity Bank Plc 540 129,000 27 006 450
Ecobank Nigeria Plc 406,043,000 20 302 150
Standard Chartered Bank Nigeria Ltd 362 542 981 18 127 149
Union Bank of Nigeria Plc 356,452,000 17 822 600
Stanbic Bank IBTC SA 368,357,000 18 417 850
First City Monument Bank Plc 311 746 155 15,587,308
Wema Bank Plc 246 974 959 12,348,748
Sterling Bank Plc 228,791,000 11,439,550
Citibank Nigeria Ltd 209 236 306 10,461,815
Polaris Bank Plc 204,832,000 10,241,600
Unity Bank Plc 91 130 360 4,556,518
Providus Bank Plc 89 567 141 4,478,357
Coronation Merchant Bank Ltd. 72 327 019 3,616,351
FBN Merchant Bank SA 39 370 061 1 968 503
Nova Merchant Bank Ltd 35 170 012 1,758,501
FSDH Merchant Bank Plc 27 061 559 1,353,078
Bank Globus SA 25,999,790 1,299,990
Rand Merchant Bank Ltd 22 899 811 1,144,991
Jaiz Bank SA 22 590 165 1,129,508
Titan Trust Bank Ltd 22 521 705 1,126,085
9 641 457 211 482,072,860


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