Central Bank’s policy has negative impact on industry earnings – Access Bank

CBN Governor, Sanusi Lamido Sanusi

              Access Bank had its 2013 half year investor presentation.
The Central Bank of Nigeria’s policy on the increment of Cash Reserve Ratio (CRR) on public funds deposited in banks is taking its toll on the banks.
Access Bank, one of Nigeria’s banks, licensed by the Central Bank of Nigeria as an International Bank, highlighted the impact of this policy in its 2013 half year investor presentation released last week.
According to the bank, the CRR on public sector of 50 per cent (from 12 per cent) in the third quarter of 2013 is having a “negative impact on the Nigerian banking industry earnings” adding that there is an “increased pressure on the cost of funds for banks”, given the reduced dependence on banks on public sector deposits.
The bank said that compliance with this policy would impact on its earnings an estimate of N3 billion in 2013.
The bank also highlighted other pressure points on banks’ earnings which include the Central Bank’s revised guide on bank charges. These include the COT which was reduced from N5 to N3/million in 2013, and to be completely phased out by 2016, the interest on savings which was increased to 30 per cent of MPR: and 3.6 per cent paid on savings from about 1 per cent.
The bank said these policies are having “Increased pressure on non-interest income for Nigerian banks and that the estimated impact of these on Access Bank’s earnings is about N6bn in 2013.”
Another issue it lamented was the increase in AMCON Charge. There was an increase in banks’ AMCON levy from 0.3 per cent in 2012 to 0.5 per cent of total assets in second half of 2013. The bank said this move would only end up increasing banks’ cost base. It said the impact on Access Bank’s Opex was estimated at N7.2 billion in 2013.
Highlights of 2013 half year result
The bank’s Net interest Income (NII) declined by 29 per cent to N39 billion year-on-year but up 29 per cent to 22 billion from 17 billion quarter-on-quarter. Net Interest Margin (NIM) improved by 60 basis points (bpts) from the depressed first quarter 2013 level to 6.8 per cent in second quarter (QoQ), Non-Interest Income was up N5.3 billion or 20.9 per cent YoY to N30.7 billion and down N6.9 billion or 36.7 per cent QoQ to N11.9 billion, Operating expenses up N5.4 billion or 11.2 per cent YoY to N53.8 billion and N4.4 billion or 17.8 per cent QoQ to N29.1 billion, while the contribution of Non-Interest income to gross earnings increased to 30 per cent in first half 2013 from 23 per cent.
Profit Before Tax (PBT) declined by 13 per cent to N26 billion in half year 2013 but increased by 36 per cent to N15 billion QoQ. Funding cost increased by 16 per cent in half year due to high interest rate environment, loan growth of 11 per cent from N623 billion in Q1 to N691 billion in Q2, 14 per cent reduction in interest income from earning asset resulting from sale of AMCON bonds in second half year 2013 and non-interest income declined by 36 per cent QoQ as a result of significant non-recurring dividend income from Q1.
Key drivers of the half year results, according to the bank, include growth in interest expense due to high cost of funding due to high interest rate environment. The growth was driven by increased transaction volume, strong dividend income and good trading performance; significant decline in premium income from WAPIC (Insurance) (seasonality), increase in AMCON surcharge and other non-recurring expenses such as additional NDIC premium, (N568 million) claim expenses by WAPIC (N1.3 billion), depreciation adjustment (N768 million), professional fees and branding cost (N560 million) and card charges (N600 million) among other parameters.
Covering up anticipated earnings shortfall

With these anticipated shortfalls in banks’ earnings due to varying regulatory policies, Access Bank highlighted set targets for second half 2013, as well as paths to which it can improve it services to its customers and attract new ones, while hoping to generate more earnings doing so.
The bank said Personal Banking is one of the focus of its growth priorities and it intends to upgrade telemarketing centres to improve customer contact (up 90 per cent) from once in 2 months to once every month, improve cross selling, increase product penetration, increase alternative channels such as online banking, verve banking centre and mobile banking to drive transaction activities, generate fee income and focus on growing low cost deposits whilst increasing customer base.
On growth projection, it intends to reactivate 500, 000 dormant accounts, increase active internet banking users from 100, 000 to 500, 000; 40,000 walk in customers monthly, Grow Salary Account by additional 250, 000. Also, it hopes to achieve a loan growth of N10 billion by 2013 financial year end (Personal loans: 2 billion, Credit Cards: 2.5 billion, Vehicle finance: 3.5 billion, Mortgages: 2 billion) and an income uplift of N1billion among a series of other strategies.
Despite these odds, the Central Bank’s policy is here to stay, at least, in the short time.
Ayodeji Ebo, a Research Analyst at Afrinvest, an investment bank, said there was pressure in the market following the policy announcement, as banks scrambled for funds to meet the new Central Bank’s requirement. The Cash Reserve Requirement (CRR) on public funds was raised to 50 per cent, thereby necessitating a sell down on investments where these funds have been invested.
He said the Central Bank is worried about banks’ practice of sourcing public sector deposits at fairly cheap rates and lending the same to government via its fixed income securities, at higher rates. So basically, they collect money from the government and borrow the government via treasury bills and so on. According to him, the banks will have to call back their funds from the sources they have invested in and source for more deposits; at perhaps, higher rate, to comply with the policy.
Government’s deposit with the Central Bank is currently estimated at N2.6 trillion with federal government constituting 50 per cent (N1.3 trillion) and State and local governments approximately 20 per cent of N1.3 trillion.
Mr. Ebo said bank’s lending rates may rise due to the development, but they may still remain in the 20’s, as lending rates have proven over time, to be inelastic to changes in market dynamics.
“It is a further contractionary measure by the Central Bank. The impact of this policy will quarantined an additional 38 per cent of bank’s deposit from the public sector, as they already have 12 per cent as reserve across all their deposits. Hence, the banks will need to sell down and raise 38 per cent of their deposit (from the Public sector),” he said.