RPT-Fitch: Nigerian banks are unlikely to repeat 2012 profit highs

(Reuters) - (The following statement was released by the rating agency)

Nigerian banks are unlikely to see a repeat of their robust 2012 profits because of increasing pressure on earnings, Fitch Ratings says. Tougher regulations together with higher funding costs are likely to constrain profitability over the next 18 months.

The central bank is focusing on consumer protection and encouraging financial inclusion in this post-crisis period. We expect new limits on bank charges imposed by the Central Bank of Nigeria to dent what have been highly profitable fees and commissions, particularly for those with largeretail franchises. The most significant impact is likely to arise from the gradual phasing out of "commission on turnover" - a customer transaction fee - by 2016.

Monetary policy continues to be tight with the central bank last week raising the cash reserve requirement on public sector deposits to 50% effective 7 August 2013. Previously there was a 12% requirement on all customer deposits. The revision applies to around NGN1.3trillion (USD8bn) of deposits and means that NGN500bn of additional liquidity could be withdrawn. We expect banks to fill any funding short-fall with more expensive sources or by selling liquid assets, leading to a sharp negative impact on net interest margins.

High treasury bill yields during 2012 boosted banks' interest income. Although continuing tight monetary policy indicates that a sharp fall is unlikely, the yields have fallen slightly so interest income from banks' large sovereign bond portfolios is likely to be lower in 2013. The central bank has also stipulated that interest rates for savings deposits should not be lower than 30% of the monetary policy rate, currently at 12%. Overall, there could be at least an average 100-200bp negative impact on margins over the next 12-18 months. Further margin pressure may arise if the authorities impose caps on lending rates to nationally important sectors, such as SMEs or agriculture.

Costs for the clean-up of the recent banking crisis are also rising. We expect a 200-300bp increase in cost/income ratios from the increase in the annual levy for AMCON - the 'bad bank' - in 2013 to 0.5% of total assets, from 0.3%. We believe the banks can partly offset the earnings pressure by boosting volumes, widening the range of fee-based products and concentrating on low-cost deposits. The AMCON bond maturities in December 2013 and October 2014 should give banks additional liquidity to expand as the AMCON bonds will be repaid with a mixture of cash and treasury bills. But if growth leads to a loosening of underwriting standards or exposure to new and untested segments, such as mass retail or the newly privatised sectors such as power, then there could be a relapse of bad debt problems.

Weaker earnings and rapid growth would put greater pressure on capital. High capital buffers are necessary as the banking system is exposed to concentration risks and Nigeria's short credit cycles. These risks are reflected in the banks' low 'b' range Viability Ratings. A key rating driver is the maintenance of adequate core capital to support their growth in a difficult operating environment (Nigeria is rated 'BB-'/Stable). We would not view Tier 2 issuance as a substitute for raising new equity to support any material asset growth.

Source: Reuters