Against the odds of the Covid-19 pandemic, the financial services industry in Nigeria blazed the trail, accounting for 28 percent of the nation’s gross domestic product (GDP). But despite the big feat, players in the industry still have their stories of woes to tell, SAMUEL ADEGOKE writes.
Nigeria, Africa’s largest economy, like other economies across the globe contracted by 6.1 percent in second quarter of 2020 as major sectors driving the economy recorded a downturn. The financial services industry, where the banking sector is a key driver, however showed resilience as it accounted for the biggest growth in GDP amid the Covid-19 pandemic. The ability of the sector to leverage on digital channels to drive business stood it out in the turbulent times as Nigerians relied on these tools to communicate, and to conduct business and financial transactions.
Other sectors of the economy which survived the onslaught of the pandemic and recorded growth in the period were telecommunications and agriculture.
As disclosed by the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, the closure of schools, hotels and restrictions on movement led to contractions in the Transportation (-49%), Accommodation (-40%), Construction (-32%) and Education (-24%) sectors.
Despite the growth recorded in the financial services sector in second quarter, there are also the downsides as a result of the impact of the pandemic. Some of the visible areas are declining profitability in the banking sector, downsizing of staff, and sudden rise in Non-Performing Loans (NPLs) among others.
The top five commercial banks in Nigeria recorded mixed performance in half year of the financial year ending December 31, 2020. While some grew their bottom-line, others did not have it that smooth as profit dropped compared with the performance in first half (H1), 2019. Still, analysts have predicted that the pressure on earnings will not abate in the second half of the year.
Declines in income from investment securities and yields on assets were two major forces that affected the earnings of banks in the first half of the financial year ended June 30, 2020.
A half year performance review of leading tier-one banks carried out by Newspeak showed that Access Bank Plc recorded a decline in profitability, though marginal. Earnings per share (EPS) dropped by -8.9 percent compared to the figure in H1, 2019, N1.73. The bank’s board has proposed an interim dividend of N0.25 per share same as it did in H1, 2019.
UBA recorded EPS of N1.24 (-23.5% vs. H1-19). Nonetheless, the board has proposed an interim dividend of N0.17 per share (H1-19: 0.20/s), which equates a yield of 2.6 percent based on the closing price of N6.55 as of September 1, 2020.
GTB witnessed a five percent drop apiece in profit after tax and before tax due tosharp increase in operating expenses and impairment charges. The bank reported a 1.5 percent year on year increase in gross earnings (GE) to N225.1b, despite pressure on interest and non-interest income amid extreme regulatory environment and global public health crisis.
Only Zenith Bank and FBN Holdings Plc among the five were able to record appreciable growth in profitability in the review period. Zenith Bank recorded strong earnings growth over the corresponding period of the prior year. On the EPS of N3.30 (+16.6% vs. H1-19), the board has proposed an interim dividend of N0.30/share (H1-19: 0.30/s). Also, profitability was stronger, with profit-before-tax settling 2.2 percent higher year-on-year. However, profit-after-tax settled 16.8 percent higher year-on-year, on account of a 54.8 percent decline in income tax expense.
FBN Holdings Plc reported gross earnings of N296.4 billion for the six months ended June 30, 2020, showing an increase of 5.8 per cent, from N280.3 billion for the corresponding period of 2019. Net interest income rose 7.4 per cent from N141.7 billion to N131.3 billion in 2020, while non-interest income grew by 46.8 from N54.6 billion to N80.1 billion in 2020.
Data from the National Bureau of Statistics (NBS) has shown that Nigerian banks laid off 2,477 of their employees in the second quarter of 2020 due to economic disruption by the Covid-19.The banking sector reduced its total headcount to 94, 498 as of June 2020 from 96, 975 in March of the same year. Total banking sector employees was 103, 610 at the end of 2019. Personnel expenses make up about 21 per cent of commercial banks operating cost and are typically the first port of call for massive cuts. According to the data, contract staff, which represented 43 per cent of total bank staff, constituted the most affected of the job cuts making up 2, 239 out of the 2, 477 losses recorded in the period. The banks have since December 2019, laid off a total of 6, 408 contract staff. Staff designated as contract have always been an easy target for lay-off as their contract does not provide them with the condition of service enjoyed by permanent staff.
Rise in NPLs
The Nigerian banking sector has recorded a 14 per cent rise in Non-Performing Loans (NPLs) in the first half of 2020 ending a two-year consecutive decline in NPLs, since third quarter 2018.
The National Bureau of Statistics (NBS), in its latest report on the banking sector, noted that non-performing loans in Nigerian banks increased to N1.212 trillion at the end of June 2020, from N1.059 trillion recorded in December 2019, rising by N152.4 billion or 14.38 per cent in six months. According to the report, at the end of the first half of 2020, Oil and Gas sector contributed the largest share to NPLs in Nigerian banks, recording a significant 22.2 per cent increase in NPLs from N219.91 billion recorded at the end of quarter four of 2019 to N268.79 billion in Q2 2020.
Construction sector recorded a 93.4 per cent increase, from N86.79 billion in Q2 2019 to N167.86 billion in Q2 2020. One of the biggest contributors to NPLs in Nigerian banks was Commerce and Trade as it recorded a significant 17.5 per cent rise from N146 billion to N171.55 billion at the end of Q2 2020. In spite of the rise in NPLs across critical sectors, some sectors including agriculture, transportation, power & energy, and education recorded a decline.
The recent upward trend in Non-Performing Loans is mostly attributed to non-payment of loans by bank obligors due to the covid-19 induced lockdowns. Nigerian banks have also seen their asset quality decline due to the fall in oil prices.
The New Normal
Now, in this COVID-19 era, the continued need to access funds—coupled with an increased need for physical distancing—has created a gap that non-physical methods of payment are primed to fill. In Nigeria, Deposit Money Banks are now intensifying digital operations in lieu of traditional channels and rapidly increasing their stake in FinTech even as financial technology companies form partnerships of the sort that SystemSpecs recently announced with Paga and Cellulant to extend financial services through digital channels to the nooks and crannies of Nigeria.
Amidst growing social distancing measures, the need for digital financial options including contactless payment systems and mobile money services is even more expedient. Digital financial service operators, keying into various government efforts, are increasingly playing an appreciable role in reducing entry barriers that previously gave rise to financial exclusion. For example, peer-to-peer (P2P) services like KiaKia and FINT enable individuals to pay and reimburse each other without exchanging cash.
MTN’s Y’ello Digital Financial Services waived user fees for Cash2Cash – a local money transfer service offered by its MoMo Agent Network. In other parts, Safaricom has implemented a fee waiver on M-Pesa to reduce face-to-face transactions in response to the COVID-19 outbreak. These laudable steps by financial service providers will be even more effective if supported by appropriate regulation.
John Obaro, Founder, Chief Executive Officer, SystemSpecs Nigeria Ltd, revealed that electronic transfers have emerged as a proven catalyst for financial sector development, noting that the push for digital products may persist long after COVID-19.
He said it is important that governments embrace the private sector in the development and implementation of financial inclusion policies, especially as the cashless policy comes into effect. “Though the opportunities are evident, the extent to which they can be leveraged is largely dependent on policy, as well as tailored products and services.”
Obaro believesthatthe current circumstances in Nigeria have presented providers with a means to better understand the customer groups they cater for and tailor their services to encourage use on a consistent basis, even after the pandemic.
“Ultimately, a well-rounded financial sector is characterised by the vast availability of payment and other financial services, offered by traditional and non-traditional players including as banks and non-banks. National financial inclusion strategies should, therefore, strive to create and sustain an environment that protects and benefits consumers, without prohibiting growth,” he said.