Banks’ Profits to Drop Over Weak Loan Demand

• Banks’ Profits to Drop Over Weak Loan Demand

Banks are unlikely to post large profits this year due to weak loan demand and poor economic growth, Head, Research at Coronation Merchant Bank, Guy Czatoryski has said.

Speaking yesterday during the unveiling of the 2019 economic outlook by the bank in Lagos, he said the weak demand for loans is affecting banks’ profitability and ability to grow.

According to him, the high yields on treasury bills will also drop after the 2019 general elections planned for next month.

He said: “They are unlikely to experience much loan growth, given the weak economy and the fact that they can benefit from high T-bill yields. On the other hand, bank stocks are cheap in historical terms. So, if interest rates come down later in the year and the market conditions improve, then there could be a sharp rally in bank stocks later in the year”.

He said that the challenge with loan advancement in Nigeria is that only few people come forward to borrow given the slow growth in Nigeria Gross Domestic Product (GDP). He said that the weak loan demand is the biggest challenge facing banks and will cut their profitability.

He explained that regular bank customers that were borrowing excessively before hardly come back for loans given the poor state of the economy.

Czatoryski said that weak borrowing now witnessed among bank customers has nothing to do with high interest rate.

“If you tell me that loans are expensive today, they have been expensive in the last 10 years but that did not stop people from taking loans. It is not a question of pricing for the loans but weak demands for products. The industry is weak. It is very important not to confuse that,” he said.

Speaking on the impact of the oil sector on the economy, Czatoryski said “A lot depends on oil this year. We forecast an average $58 per barrel for 2019. An average much below this means the Central Bank of Nigeria (CBN) will have to keep rates very high and could even challenge naira/ dollar argument. An average much about $60 per barrel means the CBN will feel confident about the currency and will be able to cut rates later in the year, in court quarter, less likely in third quarter.”

On exchange rate, he said the current rate of N365.48/$1 is likely to prevail this year. “The CBN’s policy is to defend the rate and with reserves at $43 billion, it is in a strong position to do so. We think the CBN will supply US dollars to the forex markets at an average rate of $500 million per month during 2019. This is compatible with maintaining a strong reserve level,” he said.

“On interest rate, he said If, as we think, the oil prices will average $58.00/bbl this year, then we think the CBN will want to keep interest rates high. It will do this through its open market operations (OMO). We think OMO will be issued in a range of 17 per cent to 19 per cent and that T-bill rates will be very close to this level during 2019. We look at Nigeria in the international context of interest rates. Nigerian T-bill rates look competitive in the context of other emerging market rates – which is why the CBN is having success in attracting inflows of Foreign Portfolio Investment. However, if oil trades at substantially above $60/barrel during 2019 then foreign investors in T-bills will be encouraged and the CBN might well be in a position to cut rates in fourth quarter 2019, or even in third quarter 2019,” he said.

This could be helped by a downtrend in inflation. “Inflation has proved stubborn and has trended at around 11 per cent over the past few months. But if inflation trends, in 2019, towards the CBN’s target band of six to nine per cent, then it will help the CBN cut rates in order to stimulate the economy. We are agnostic on politics. However, there is some evidence that in the period after general elections (2011 and 2015) yields in the T-bill market tend to fall. This might help persuade the CBN to cut Open Market Operation rates later in the year. We expect growth to be 2.25 per cent in 2019. Consumer demand is very weak and we do not expect an uptick in the immediate future. Government expenditure does not vary much from year to year, with the 2019 budget currently considered at N8.83 trillion versus N9.12 trillion for 2018 (three per cent lower),” he said.

Speaking more on the weak lending in the economy, Czatoryski said: “How big is the banking sector and how big is the economy? You are talking as if lending is about 100 per cent to Gross Domestic Product (GDP). Lending is only about 10 per cent of the GDP. So, the link between the banking sector and the economy is not strong because most people do not have loans,” he said. “The outstanding loan from banks is not more than 10 to 15 per cent of the GDP and that is very poor. You are talking of a very small banking sector servicing a large economy. That is the problem, and it will take years for the banking sector to match growth in the economy”.