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Banks to Experience Severe Credit Losses in Late 2021 – Mckinsey & Company

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First Bank

The crisis of 2008 came from within the financial services industry. Today, in this crisis of the real economy, banks are economically afflicted alongside other sectors in society. But banks are also playing an important role in helping society through the crisis: as the conduit for state support, supporting small businesses, companies and individual citizens.

The crisis is delivering, in effect, the biggest stress test to banks, a test which the industry is withstanding to-date, whilst demonstrating resilience and purpose. The impact of the last year without the role the industry has played is likely much deeper.

Going forward, McKinsey anticipates the test presented for banks by the pandemic will evolve in two stages in the months and years ahead. First will come severe credit losses, likely through late 2021; almost all banks and banking systems are expected to survive. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024.

  • Depending on scenario, average return on equity globally would continue its decline, from 8.9 percent in 2019 to 4.9 percent in 2020 to 1.5 percent in 2021. At the trough in 2021, ROE would fall to −1.1 percent in North America, −1.8 percent in Europe, and −0.2 percent in developed Asia. ROE would fall from higher starting levels and bottom out higher in emerging Asia (2.6 percent), the Middle East and Africa (MEA; 3.7 percent), and Latin America (5.2 percent); and it would take a smaller dip to 8.6 percent in China.
  • African banks enjoyed one of the highest ROEs in the world, however the overall ROE is expected to half at 7.6 percent in next 2 years, while revenues after risk may decline by 15 percent in a muted recovery scenario. In the short term, banks will be affected by cascading credit losses resulting in 50 percent impact on revenues while in the long term, continued pressure on margins and moderate volume growth might dwarf the revenue growth to half of pre-COVID-19 levels.
  • The onset of recovery is likely to vary by country as level of provisioning done by banks in 2020 will be a deciding factor if they will see V- or U-shaped recovery. In SA and Kenya, banks have already provisioned highly for potential bad debts while Morocco and Nigeria may continue to increase provisions in 2021 as well.

Francois Jurd de Girancourt, Head of the Banking Practice in Africa said: “The ROE recovery post COVID-19 is projected to be lower compared to pre-crisis levels, unless banks further improve their cost efficiency. African banks cost to asset ratio is 2.3 times higher than the global average and based on our estimates, banks would need to increase their operating efficiency by at least 25-30 percent to converge back to 2019 ROEs.”

Marie-Claude Nadeau, San Francisco-based McKinsey partner and report author said: “Banks will need to act quickly to return to precrisis ROE levels, in a far more challenging environment than the decade just past. The period of zero percent interest rates is being prolonged by the economic crisis and will reduce net interest margins, pushing incumbents to rethink their risk-intermediation-based business models. The trade-off between rebuilding capital and paying dividends will be stark, and deteriorating ratings of borrowers will lead to inflation of risk-weighted assets, which will tighten the squeeze.”

Mayowa Kuyoro,  a partner at McKinsey & Company in Lagos, Nigeria said: “In Nigeria, our analysis is that ROE levels are likely to recover by 2024, although they will remain low compared to pre-crisis levels. To proactively manage this, Nigerian banks will need to revisit and interrogate matters of efficiency and productivity to deliver services to more people at lower cost. The rapid shift to digital is clearing the way for banks to ramp up their use of data and analytics to enhance services and reduce costs. For banks that are existing market leaders, now is the time to consider investing in technology infrastructure and talent to expand beyond current customers and products. Equipping employees with the right skills and digital tools, doubling down on digital marketing, and establishing robust digital infrastructure are likely to be key enablers for success in the next normal.” 

For the long term, banks need to reset their agenda in ways that few expected nine months ago. McKinsey sets out three imperatives that will position banks well against the trends now taking shape.

  1. They must embed newfound speed and agility, identifying what worked well in their response to the crisis and finding ways to preserve those practices.
  2. They must fundamentally reinvent their business model to sustain a long winter of zero percent interest rates and economic challenges, while also adopting the best new ideas from digital challengers.
  3. And they must bring their broader purpose to the fore, especially environmental, social, and governance issues, and collaborate with the communities they serve to recast their contract with society.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Banking Sector

Ecobank Partners NiDCOM to Mobilise Nigerians Abroad for National Development

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In a bid to fulfill it’s objectives and mandate, the Pan African Bank has promised to support Nigerians living and working abroad through it’s partnership with NiDCOM.

The Managing Director, Ecobank Nigeria, Patrick Akinwuntan has stated that the bank is privileged to work closely with the Nigerians in Diaspora Commission, (NiDCOM) and will continue to pursue one of its key mandates of helping to enhance the economic development and integration of Africa through its support to Nigerians living and working abroad.

Speaking at the maiden edition of the Diaspora Quarterly Lecture Series with Ecobank as the sole banking partner which took place on Saturday, 8th May 2021, he noted that Ecobank remains a critical bridge for Nigerians abroad, as it has made huge investments in the necessary platforms to enable them connect with home seamlessly. The event held online and had over 2000 participants from across all the continents in attendance.

“Nigerians in the diaspora play a major role in nation building, their contribution goes a long way to catalyse economic development. For us at Ecobank, we are a pan-African institution positioned to foster the economic growth and integration of our continent, so we are particularly pleased to work closely with the Nigerians in Diaspora Commission (NiDCOM), ably led by the Chairman/CEO, Hon Abike Dabiri-Erewa”.

“We are committed to ensuring that every Nigerian living abroad is able to remit home seamlessly and affordably, access viable investment opportunities and as the financial institution of choice for Nigerians abroad, we have deployed the necessary resources to actualise this.” He stated.

The Minister of Interior, Ogbeni Rauf Aregbesola, who was also present, reiterated the readiness of the government to collaborate with Nigerians in the diaspora, highlighting the new processes put in place to facilitate passport issuance, noting that all backlog of passport applications would be cleared by the end of May 2021.

Also speaking, the Hon. Minister of State, Foreign Affairs Amb. Zubairu Dada said harnessing the human capital and material resources of Nigerians in the diaspora towards the socio-economic, cultural, and political development of Nigeria can no longer be ignored. He pointed out that the Nigerian diaspora community is well educated, resourceful, skilled, and exposed to global best practices.

The NiDCOM Chairman/CEO, Hon. Abike Dabiri- Erewa explained that the Diaspora Quarterly Lecture Series is projected to be a major aspect of national discourse, where Nigerians abroad can be kept abreast of the government’s policies, programmes and projects.

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Increase in Price Boosts Revenue of Dangote Sugar by 41.5 Percent in Q1 2021

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Dangote Sugar - Investors King

Revenue of Dangote Sugar Refinery Plc rose by 41.5 percent to N67.394 billion in the first quarter (Q1) of 2021 from N47.643 billion recorded in the same quarter of 2020.

According to the leading sugar manufacturer, the increase in revenue was a result of the increase in the price of sugar in the first quarter. The company claimed price adjustment was necessary to mitigate the negative effect of inflation and depreciation on the company.

Volumes only rose by 5.7 percent during the quarter despite a 41.5 percent increase in revenue, meaning the increase in price was the main sales catalyst.

In the company’s unaudited financial statements, gross profit grew from N12.721 billion in Q1 2020 to N18.044 billion in Q1 2021.

Similarly, operating profit stood at N15.884 billion, up from N10.747 billion posted in Q1 2020.

Finance cost more than double from N1.353 billion in Q1 2020 to N3.412 billion in Q1 2021.

Dangote Sugar’s profit before tax rose from N9.509 billion recorded in the corresponding quarter to N11.949 billion in the quarter under review.

The company paid N3.646 billion in income tax, slightly higher than N3.137 paid in the same quarter of 2020.

Profit for the period grew from N6.372 billion in Q1 2020 to N8.302 billion in Q1 2021.

Commenting on the company’s performance, Dangote Sugar said “EBITDA increased by 34.7% to N17.02 billion (2020: N12.64 billion) on account of increased earnings. Group profit after taxation for the period increased by 30.3% to N8.30 billion (2020: N6.37 billion) reflecting management’s unrelenting drive to deliver consistent shareholder value.”

On price increase, the company hinged it on series of devaluation carried out in 2020 by the Central Bank of Nigeria (CBN), escalating inflation, port congestion and rising in price of global sugar. Dangote Sugar said its imported raw sugar from Brazil under Federal Government’s backward integration plan.

We have continued to witness high cost of raw materials, energy costs and other input costs due to rising inflation and FX rate fluctuation. Further cost escalation is anticipated in the year as inflationary pressure mounts,” the company said.

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FBN Holdings Suffers 39 Percent Drop in Profit to N15.6 Billion in Q1 2021

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FBN Holdings - Investors King

FBN Holdings Plc profit after tax declined by 39 percent from N23.140 billion recorded in the first quarter (Q1) of 2020 to N15.6 billion in the first quarter of 2021.

In the leading financial institution’s unaudited financial statements released through the Nigerian Exchange Limited, gross earnings declined by 14.5 percent to N137 billion in the period under review, down from N160 billion filed in the previous quarter.

Similarly, net interest income declined from N60.253 billion achieved in Q1 2020 to N52.793 billion.

Net interest income after impairment charge for losses also dipped from N50.547 billion in Q1 2020 to N39.619 billion in Q1 20201. While net fee and commission income rose from N20.773 billion in Q1 2020 to N28.427 billion in Q1 2021.

Profit before tax declined by 34 percent to N18.906 billion in the quarter under review, down from N28.680 billion posted in the corresponding quarter of 2020.

FBN Holdings paid N3.285 billion in income tax in the first quarter of 2020.

Therefore, profit for the period stood at N15.621 billion. While Net Assets contracted from N765.2 billion to N764.8 billion.

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