Tier 1 Banks Maintain Market Dominance
MARKET INDICATOR
By Obinna Chima
Five commercial banks maintained their dominance of activities in the banking industry in the second half of 2016, according to the Central Bank of Nigeria (CBN).
The CBN’s latest Financial Stability Report for the half year ended December 2016 however did not disclose the names of the banks.
According to the report, the average concentration ratio of the five largest banks (CR5) with respect to deposits and assets stood at 53.70 and 53.68 per cent, respectively, at end-December 2016, compared with 43.3 and 51.9 per cent at end-June 2016.
It revealed that the market shares of the largest bank with respect to deposits and assets stood at 13.20 and 14.23 per cent, respectively.
On the other hand, 19 other banks had market shares ranging from 0.02 per cent to 6.19 per cent, in deposits, and 0.06 per cent to 6.23 per cent in assets.
The concentration ratio of the banking industry was supported by the Herfindahl-Hirschman Index (HHI) for the industry at 773.21 and 774.50 for deposits and assets, at end-December 2016, compared with 764.13 and 757.00 at end-June 2016, respectively.
This, according to the central bank, showed weakening of the competitiveness of the industry compared to the first half of 2016.
Assets-Based Indicators
However, commercial banks in Nigeria experienced deterioration in assets quality at end-December 2016. The ratio of non-performing loans (NPLs) to gross loans deteriorated in the second half of 2016 by 2.3 and 8.7 percentage points to 14.0 per cent at end-December 2016 compared with the levels at end-June 2016 and end-December 2015, respectively.
The deterioration in asset quality was largely attributed to the rising inflationary trend, negative Gross Domestic Product (GDP) growth, and the depreciation of the naira.
The ratio of core liquid assets to total assets increased by 2.3 percentage points to 16.3 per cent at end-December 2016 from 14.0 per cent recorded at end-June 2016. Also, the ratio of core liquid assets to short-term liabilities increased by 2.9 percentage points to 24.5 per cent at end-December 2016, compared with 21.6 per cent at end-June 2016. The increase in the ratio of core liquid assets to both total assets and short-term liabilities reflected improved buffers to absorb short term obligations.
Income and Expense Based Indicators
The return on assets (ROA) declined by one percentage point to 1.3 per cent at end-December 2016 from 2.3 per cent recorded at end-June 2016, while the ratio of non-interest expenses to gross income increased to 63.8 per cent at end-December 2016 from 54.6 per cent recorded in the preceding half. The ratio of interest margin to gross income deteriorated to 50 per cent during the review period from 61.4 per cent at end-June 2016, while the ratio of personnel expenses to non-interest expenses declined to 30.5 per cent at end-December 2016 from 41.2 per cent recorded at end-June 2016.
The banking industry stress test was carried out at end-December 2016, covering 23 commercial and merchant banks, to evaluate the resilience of the banks to credit, liquidity, interest rate and contagion risks.
“The banking industry is categorised into large (assets ≥N1 trillion), medium (assets >N500 billion but<N1 trillion) and small banks (assets ≤N500 billion).
“The post-shock stress test results showed that a 100 per cent increase in NPLs will lead to a CAR of 10.55, 12.01, 10.34 and -27.03 per cent for the banking industry, large, medium and small banks, respectively. The results revealed that all the groups except small banks can withstand a 100 per cent increase in NPLs.
“However, none of the groups could sustain the impact of the most severe shock of a 200 per cent increase in NPLs as their post-shock CARs fell below the 10 per cent minimum prudential requirement.
“The impact of the severe shock scenario will result in a decline of CAR to 5.87, 8.25, 7.80 and -84.50 per cent for the banking industry, large, medium and small banks, respectively.
“The baseline CAR for the banking industry, large, medium, and small banks stood at 14.78, 15.47, 12.75 and 3.14 per cent, respectively. These represented a 0.04, -0.18, 0.76 and -0.02
“The economic headwinds have adversely impacted bank borrowers, resulting in rising NPLs which required additional provisioning by banks, thereby reducing the banks’ CAR. The decline of the CAR of small and medium banks did not weigh significantly on the industry CAR because large banks hold a significant proportion (88.02%) of total banking industry loans,” it added.
Consumer Credit
The volume of consumer credit during the second half of 2016 reduced marginally by 2.51 per cent to N762.07 billion relative to its level at end-June 2016, due largely to build up of uncertainties and higher cost of funds in the economy. Consumer credit, which constituted 3.53 per cent of the total credit to the core private sector, was 0.3 percentage point lower than the proportion in the first half of 2016.
As at end-December 2016, bank credit to the various sectors showed an upward trend. Sectoral credit to the private sector rose by 3.9 per cent to N16.293 trillion at end- December 2016 from N15.678 trillion at end-June 2016.
The oil and gas sector accounted for the highest share of total credit with 30.02 per cent, compared with 28.78 per cent in the first half of 2016.
Manufacturing and power and energy sub-sectors accounted for 13.6 per cent and 4.5 per cent, compared with 12.9 per cent and 4.4 per cent, respectively, in the preceding half year.
Also, agriculture, forestry, and fishery sub-sector accounted for 3.3 per cent, indicating a 0.2 percentage point increase above the 3.1 per cent in the preceding half year. The contribution of the construction sector remained the same at 3.89 per cent as in the preceding half year.
Similarly, total banks’ deposit which was N16.674 trillion billion in June 2016 rose moderately by 0.75 per cent to N16.798 trillion in December 2016. The structure of banks’ credit in the second half of 2016 indicated that short-term maturities remained dominant in the market. Loans and advances maturing in one year and below accounted for 46.4 per cent of the total at end-December 2016, compared with 46 per cent at end-June 2016.
The medium-term maturities rose by 2.6 percentage points to 20.7 per cent, from its level at end-June 2016, while the long-term5 maturities rose to 32.9 per cent, compared with 35.9 per cent at end-June 2016.
Banks’ deposit liabilities showed an increasing trend with short-term deposits of less than 1- year tenor constituting 95.6 per cent of the total, of which 75.9 per cent had a maturity of less than 30 days.
Deposits of more than 1-year but less than 3-year tenor, constituted 1.2 per cent of total deposits, while deposits of more than 3-year tenor, constituted 3.2 per cent of total deposits at end-December 2016 compared with 2.9 and 2.8 per cent at end-June 2016 and the corresponding period of 2015, respectively.
Treasury Bills
Nigerian Treasury Bills (NTBs) of 91-, 182- and 364-day tenors totalling N2.098 trillion were issued and allotted during the second half of 2016.
This represented a decrease of 14.61 per cent, when compared with N2.457 trillion recorded as at end-June 2016. Similarly, total subscription was lower at N3.620 trillion, depicting a decrease of 28.41 per cent, when compared with N5.057 trillion recorded in the first half of 2016. The decrease in NTBs issued, allotted and subscribed was attributed to the tight liquidity in the banking system precipitated by the sustained mop-up by the CBN, provisioning of funds by banks for the special foreign exchange interventions for Forwards transactions at the foreign exchange market.
“The holding structure of investments in NTBs in the review period indicated that banks took- up N887.14 billion, representing 42.28 per cent of the total NTBs issued, as against N1,745.90 billion, representing 71.05 per cent of NTBs issued in the preceding period.
“Mandate and internal customers, and CBN take-up accounted for N1,075.50 billion and N135.59 billion, respectively compared with N683.38 billion, and N28.00 billion in the first half of 2016.
“The reduced up-take by banks was attributed to tight liquidity in the banking system and higher yield in CBN bills, leading to the significant increase in mandate and internal customers’ participation as well as increase in CBN take-up.
“The total stock of NTBs outstanding as at end-December 2016 showed that banks accounted for 38.61 per cent; the non-bank, and mandate and internal customers accounted for 61.33 per cent, while CBN held the balance of 0.06 per cent.
“The range of average marginal rates for the period were 9.9800 – 15.4400 per cent for the 91-day; 12.2400 – 18.0589 per cent for the 182-day; and 14.9900 – 18.7000 per cent for the 364-day tenors,” it added.
FGN Bonds
In the review period, FGN Bonds offered for sale (new issues and re-openings) was N645 billion, representing an increase of 9.32 per cent above the N590 billion offered in the first half of 2016. Public subscription and sales decreased to N941.90 billion and N499.20 billion, at end-December 2016, from N1.184 trillion and N529.50 billion, at end-June 2016, respectively.
The decrease in subscription and sales were attributed to the liquidity constraints in the banking system which led to reduced patronage of FGN bonds by banks despite the strong appeal of fixed income assets and the impressive yield on FGN bonds.
“The price of FGN Bonds at the secondary market declined as a result of reduced transactions and demand, as well as increased banking system liquidity constraints and other macroeconomic uncertainties.
“Consequently, yields on FGN Bonds at end-December 2016 increased considerably at both the long and short ends of the curve when compared with FGN bond yields in the preceding period.
“The upward review of the MPR by 200 basis points in the second half of 2016, and the sustained open market operations activities by the Bank which further reduced market liquidity, contributed to increased yield on FGN bonds in the secondary market,” it added.
