Juicy Nigerian Yields May Just Spare Banks From Profit Pains
(Bloomberg) -- Nigeria’s biggest banks have found a way of shielding earnings from another year of tepid credit demand -- buying up local government bonds that offer among the highest yields in emerging markets.
Lenders are reducing credit to companies and consumers hampered by challenges in an economy too dependent on oil -- the prices of which have tumbled nearly 30 percent since October. Steep inflation, a lack of foreign exchange and high levels of unpaid loans are also weighing on banks’ risk appetite. That’s making the allure of parking cash in state securities with interest rates of up 17.6 percent almost irresistible.
The yields are offering “short-term respite” for banks, said Nick Ndiritu, co-manager for Allan Gray’s $389 million Africa equity fund, especially where the “perennial concern is the lack of a diversified base of credit-worthy borrowers.”
So far, it’s paying off. Nigeria’s naira bonds have returned 6 percent this year and are the second-best best-performing local debt in emerging markets for the month of February, according to data compiled by Bloomberg. Yields might be driven higher by the last-minute delay to this weekend’s elections. The Nigerian Stock Exchange Banking 10 Index rose 2.9 percent by the close in Lagos on Tuesday, its biggest advance in almost two weeks, after sliding 3.2 percent on Monday from the election uncertainty.
While keeping its base interest rate at a record 14 percent, the Central Bank of Nigeria is reining in liquidity by offering short-term bills known as open market operations, or OMOs, to lenders. By reducing the amount of cash in the financial system, the Abuja-based regulator can also avoid speculators buying dollars, which causes the naira to weaken, thereby alleviating some price pressure. Inflation eased to 11.37 percent in January.
Bigger is Better
Banks, for example, could’ve snapped up 364-day OMO bills at a yield of 15 percent at a sale on Feb. 14, or Treasury Bills of the same duration for 17.57 percent in an auction a day earlier. Longer-dated OMO bills may rise to as high as 23 percent if higher U.S. interest rates cause outflows from Nigeria, according to Lagos-based Chapel Hill Denham Securities Ltd.
But it is an area where only the nation’s biggest lenders, such as Guaranty Trust Bank Plc and Zenith Bank Plc, have strong enough balance sheets to play in. Smaller firms are too busy trying to recover non-performing loans and build capital buffers, whereas the larger banks have relatively clean non-performing loan books.
This means small banks need to conserve all the cash they can, potentially causing them to miss out on the low-hanging fruit of buying government debt. The one downside is that the higher yields could push up the cost of funding, squeezing net-interest margins, especially for smaller lenders unable to pass the extra expense onto customers.
“Big banks are always winners in Nigeria because their scale advantages dwarf any inefficiencies they may carry,” said Bunmi Asaolu, the head of equity research at FBN Capital Ltd. “Tier 2 banks will continue be the laggards.”
Zenith Bank, the country’s second-biggest lender, expects higher interest income to boost earnings this year, while it will increase its focus on consumer loans, according to Managing Director Peter Amangbo. Guaranty Trust, the nation’s biggest lender, is forecasting that banks will see slower earnings growth as companies struggle amid lower crude prices and uncertainty around the elections.
“Credit growth is expected to remain subdued as the economy remains underperforming, and trading income might be lower than what the banks recorded in 2018,” said Olabisi Ayodeji, a banking analyst at Exotix Partners LLP in Lagos. “That said, it is possible that we see some support from the higher interest-rate environment.”
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