Falling Profits: Banks Plot Ways Out of Bleak Year

Banking Hall

• ‘They need to be creative to get out of the woods
• We discourage them from retrenching in trying times —ASSBIFI
Some months ago, a number of banks, declared glowing profits, in what was hailed as the triumph of Nigeria’s banking sector over the gloom that overshadowed the economy. Expectedly, bank shareholders were elated that the boards had judiciously weathered the storm and come out unscathed, and were thus emboldened by the salacious dividend payouts.

However, with the announcement of last year results by about 10 other banks, it seems the harvest of profits have not spread across the sector, as some of them reported as much as 80 per cent drop in profits.

Also, there has been a tsunami of retrenchment in the banking system, which analysts attribute to the affected banks’ need to stay afloat by cutting cost and outsourcing non-essential services.

Though many of those that recorded sliding profits attribute the fall to bad loans, naira volatility and other economic headwinds, experts say the trend is attributable to the overreliance of the banking system on public sector funds.

They argue that the implementation of the Treasury Single Account (TSA) policy by the Federal Government may have constricted operations of banks, noting that the trend may spell the end of ‘jumbo profits’ by banks in the years ahead.

Specifically, Ecobank International Incorporated, Union Bank Plc., First City Monument Bank Limited, Wema Bank Plc., Fidelity Bank Plc. and First Bank Plc. posted a combined 80 per cent decline in their annual profits.

This is seen as a radical departure from the era of stunning profits by banks, many of which have enjoyed this status since after the 2010 recession.

Commenting on its result for the year, Skye Bank said, “The management of Skye Bank Plc. wishes to intimate its shareholders and investor community of anticipated material decline in its profits for the full year ended December 31, 2015 compared with that of 2014. The expected decline in performance is attributable to management’s decision to recognise increased impairment on loans to sectors severely affected by the prevailing economic headwinds, which are yet to abate, especially the lull in the oil and gas and real estate sectors.”

In a statement on its operations for last year, First Bank said, “The investments and the interventions in the pivotal sectors were well-thought out and in the right direction. However, as global economic trends have turned out, there have been contrary outcomes with such calculated risks. This is especially the case with the change in fortune in the macro economy, as occasioned by the sharp decline in oil prices, which has resulted in acute foreign exchange shortage and the resultant impact on the loan book. The devaluation impact and scarcity of foreign exchange have resulted in a significant reduction in growth projections.

“It is acknowledged that the banking sector can only be as healthy as the economy itself and since the sector is not immune to the macroeconomic distortions, it is expected that the industry feels the effect of the turbulence. We have taken the hits. We could have been more cautious with our business decisions and risk taking.”

On his part, the Managing Director, Fidelity Bank Plc, Mr. Nnamdi Okonkwo, said, “The PBT declined by 9.6 per cent largely due to two critical factors: The 17.1 per cent increase in total expenses due to strategic investments and cost incurred in 2015 to position the business for further growth in line with our aspirations.

“The increase in impairments, due to a more prudent approach adopted with respect to a special regulatory provision, which was charged directly to the profit and loss, was responsible for the decline in profit.”

However, former President of the Chartered Institute of Bankers of Nigeria (CIBN), Mr. Ralph Osayameh said the banks were caught in the mess because they had abandoned other banking services and relied on public sector funds, a trend which largely exposed them to the volatility of crude oil prices, which calls the shots in the Nigerian economy.

Said he: “In those days, to do banking, you had to solicit for low cost savings so that you can have a better margin when you lend. But these days, many banks rely on public sector funds, but as those things evaporated, we now see what has become of them.”

He argued that the good angle to the crisis was that it would lead to creativity in the banking system, adding, “but, fortunately once the budget implementation begins and funds are disbursed, quite a number of inflows would come into the banks, and then they can start all over again. And I think they would have learnt a lesson for the future.”

Noting that the trend may eventually change the face of banking, he said, “It would be very difficult for the banks to declare the kind of jumbo profits they used to declare in the past. The banks would now be able to maintain a level of reasonable profit. The era of abnormal profits is gone and over. This is because very few people are borrowing now, as the economy is static. But by the time the boom years come, they would get profits but it won’t be jumbo profits anymore.

“If government, because of increased awareness of fiscal policy, decides to tighten its belt and make so much money go through TSA, the bank would feel the pinch. But this should force the banks to be creative. They should say, for instance, since this approach is not going through, why not look for other ways to remain in business. They should look for how to create products that would attract consumers in such a way that the experience in the past would not repeat itself again.”

He said the spotlight is on the banking system because it is pivotal to economic development, and that people are concentrating on banks, when many manufacturing companies have closed down in the last one year.

“How many state governments are capable of paying salaries? So, there is a contraction in the system. When this kind of thing occurs, you can do two things: You either expand the scope of your business, which in a recessionary economy, is not always easy. The other side of the equation is to contract, by reducing your expenses. One way of doing that is, instead of having many managers and people with many titles and having many branches, you reduce cost. But when things start looking up again, you can go out again and expand,” he said.

Noting that the banking industry was not isolated in the general decline of the economy, he said those who have been laid off would have to bear with the banks, adding “Banking is not a charity organisation; it is a serious commercial enterprise. The shareholders are expecting returns on their dividends, but it is not just the banks alone, it is spread across industries.

“I have studied the balance sheets of many companies and many of them are losing profits. Companies that you thought should do well are now beginning to feel the pinch. The consumer items some industries produce, how many customers have the purchasing power to buy as they used to? Many organisations are losing out and contracting.

“That is why I am particularly grateful that the Bank of Industry (BOI) has come out to bail out some manufacturers, because the banks no longer have the capacity to support industries that they used to fund in the past. It is going to be felt in the system. But with the budget, there would be some kind of revitalisation. But, definitely, those days of boom are over. Now, people have to sit down and do real, creative banking”.

On how banks can survive the phase, he said many of the banks would likely introduce new products to capture the unbanked population. “We are likely to see the introduction of new products. We have quite a number of unbanked communities in the country. You don’t have to go and build the branches you would find at Lekki and Victoria Island, now you have to do little, little things.

“In those days, we used to have mobile banking. I know because of the security situation it could be difficult, but some creative, ingenious ideas would come forth. Some banks have started. Some microfinance and mortgage finance institutions are beginning to create products in such manner that they can galvanise the otherwise ungalvanised funds in the system.”

On his part, President of the Association of Senior Staff of Banks, Insurance and Financial Institutions (ASSBIFI), Sunday Salako, said the fall in profit is as a result of Nigeria’s challenging economic realities.

Said he: “The fall in profits is attributable to the very competitive environment we find ourselves. There is no much activity in the economy, anyway. You can see that activities in the manufacturing sector have dropped. And if we don’t have economic activities, we are not likely going to have customers who would want to do business. So, this has affected the banks.”

He noted that though the banks may be constrained, the association has called for tact in handling the challenging economic hardship.

“We don’t mint money in the banks; we rely on economic activities to operate. Those who have more would bring, while those who have little would come and take. It is with such activities that we make profit. But if the economy is bad, the profit of banks would be bad too,” he explained.

He denied claims that banks retrenched staff.

“We are not encouraging them to do that. Rather, we encourage them to carry on until the economic lull is over. The bank that was reported to have sacked its staff came out to refute the reports.”

On the challenge of managing bad loans, he said, “There would be increase in bad loans because a lot of people have done forecasts and today they are not dong business, as they should. So, if they borrowed money from the banks and they are not producing or when they produce, they do very little, as compared to what they used to have before, definitely it would affect their ability to repay loans. The major cause of the low profits is that the economy is bad.”