Banks’ Cost-to-income Spike as Inflationary Pressure Mounts

Kayode Tokede

Following record inflation rate in Nigeria, deposit money banks (DMBs) in the country have consistently recorded hikes in cost-of-income ratio threatening earnings and profitability for 2022 full year results. 

Cost-income is a ratio between the costs involved in running a business and the income the business produce.

The ratio is important for determining the profitability of a bank and it gives a clear view of how efficiently the bank is being run- the lower the ratio, the more profitable the bank.

An investigation by THISDAY revealed that banks in the half year ended June 30, 2022 reported an increase in Cost-to-income, attributable to increased operating expenses and slow income.

The National Bureau of Statistics (NBS) had reported 18.6 per cent inflation rate in June 2022 from 15.63 per cent reported in December 2021.

The hike in inflation rate is due to increased food costs, supply chain disruptions, depreciation of the naira, insecurity, and deteriorating infrastructure.

The International Monetary Fund (IMF) had projected that the present inflationary pressure will continue until 2023, leading to further concerns over a consequent global economic recession.

Extract from the banks results revealed that most listed Tier-1 banks suffer increasing cost-to-income ratio in the period under review, while most listed Tier-11 banks reported a decline in cost-to-income ratio.

Take for instance, FBN Holdings Plc leads Tier-1 bank with highest cost-to-income ratio in the period under review, while Wema Bank Plc, according to half year ended June 2022 recorded the highest cost-to-income ratio among the 10 investigated banks listed on the bourse.

As FBN Holdings reported 68 per cent cost-to-income ratio in H1 2022 from 67.90 per cent in H1 2021, Wema bank announced 81.11 per cent cost-to-income ratio in H1 2022 from 83.80 per cent in H1 2021.

Wema bank had reported operating expense that grew by 26 per cent to N26.3billion in H1 2022 from N20.8 billion in H1 2021, reflecting high inflation environment and currency devaluation.

The bank also reported N32.5billion operating income in H1 2022 from N25.1billion reported in H1 2021.

For instance, Wema Bank’s operating expenses showed changes in key components of its expense line such as AMCON levy that rose by 23 per cent y-o-y to N3.2 billion due to the growth in asset base and contingents, while NDIC premium rose 10 per cent to N2billionn impacted by growth in deposits

“Growth in repairs and maintenance (30 per cent) and others (37 per cent) primarily reflects the impact of the inflationary environment. The 19per cent increase in personnel expenses was as a result of capacity expansions and company-wide salary review during the period,” the bank said in a presentation to investors/analysts.

Commenting, the vice president, Highcap securities Limited, Mr. David Adnori said the hike in cost-to-income ratio reported by Tier-1 banks is a reflection of double-dight inflation rate, stressing that commercial banks operating in Nigeria and in Africa do not operate in isolation.

He expressed that the growth in cost-to-income reported by banks would defiantly have impact on profit and dividend payout to shareholders of these banks.

According to him, “The world is currently facing high inflation rate and Nigeria, Africa at large are not exempted from this experience, with countries on the continent witnessing record high inflation rate. The surge in inflation rate is following the rally in crude oil prices, amidst the face-off between Russia/Ukraine.

“Reacting to the surging inflation rate, regulators of several countries where Nigerian banks operate have also raised their interest rates to curb the rising cost of goods and services. However, this is yet to yield any positives as inflation rate continues to remain high. With cost impacted, Nigerian banks might suffer slow profitability this year and it might impact on dividend payout.”

Other Tier-1 banks with high cost-to-income ratio were: Access Holdings Plc with 65per cent cost-to-income ratio in H1 2022 from 60.10 per cent in H1 2021, while United Bank for Africa Plc (UBA) reported 63.20 per cent cost-to-income ratio in H1 2022 from 62.30 per cent in H1 2021.

The group managing director, Access Holdings, Dr. Herbert Wigwe in a statement said, “our operating expenses were up 35 per cent year on year to N206.7 billion at the half year 2022 compared to N189.8 billion for the corresponding period last year.

“The OPEX growth was mainly driven by the high inflationary environment, very significant regulatory costs, exchange rate movements, and the overall increase in cost of running the life franchise following the entry into four new markets in Africa which were South Africa, Botswana, Cameroon and Guinea.”

Speaking about macroeconomic environment, he said, “The uncertainty in the domestic and global economies over the last few months remains unabated with significantly increased inflationary pressures and volatility across key markets in which we operate. The Central Bank of Nigeria raised the benchmark monetary policy rate to 14per cent, up from 11.5per cent in Q1 2022, the first time in over five years.”

Also, Zenith Bank Plc reported   58 per cent cost-to-income in H1 2022 from 56per cent, while Ecobank announced 56 per cent in H1 2022, a decline from 58.70 per cent reported in H1 2021.

Guaranty Trust Holding Company Plc (GTCO) reported 49.06 per cent in H1 2022 from 48.98 per cent in H1 2021.

According to the GTCO, “OPEX grew by 11.3per cent from N89.3billion in H1-2021 to N99.5billion in H1 2022 due to the impact of rising inflation and exchange rate movement at both the official & parallel market which precipitated an increase in the general prices of goods and services.

 “The Group made cost savings from Interest saved on FCY borrowings due to continuous utilization of the Group’s dollar liquidity to repay maturing FCY borrowings.

“Overall, the Group was able to keep its Cost to Income Ratio (CIR) at 49.1per cent from 49per cent in H1-2021, though, higher than the guided 35per cent ratio owing to Inflation induced growth in variable and fixed costs element. “The Group remains committed to effectively managing its cost despite inflationary and revenue pressures in order to remain within the FY 2022 guidance.”