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Slowdown In Treasury Bills Issuance To Hurt Banks’ Profits

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Fitch Ratings thursday stated that Nigerian banks may find it more difficult to sustain their profitability this year, given the decline in net treasury bill issuance by the federal government this year.

The rating agency said in a statement that the slowdown in NTBs’ issuance marked a change of strategy, as the government looks to increase its financing from external sources and longer-dated domestic issuances.

In addition, Fitch stated that its 2018 rating outlook for the Nigerian banking sector was negative, forecasting that some Tier-2 banks would struggle to remain profitable this year.

The federal government had announced plans to refinance some maturing domestic debts with external borrowings as part of its overall debt management strategy of reducing debt service.

Other objectives of this strategy are to free up space in the domestic market for other borrowers and achieve a more sustainable debt portfolio mix of 60 per cent domestic and 40 per cent external.

But Fitch pointed out that record treasury bills issuance in 2017 helped in supporting the Central Bank of Nigeria’s (CBN) strategy to maintain a stable exchange rate.

High yields on NTBs issued in 2017 (around 13-14 per cent on 90-day bills) had attracted investors and helped to support the naira.

An increase in oil export earnings and the introduction in April 2017 of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism, commonly referred to as the “Investors’ and Exporters’ foreign exchange (FX) window”, also helped in  stabilising the nation’s currency in the second half of 2017.

However, Fitch noted that Nigerian banks are highly reliant on net interest income for profitability and treasury bills proved to be an important source of profits in 2017.

“We expect falling treasury bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018.

“Interest on securities represented 30 per cent of total gross interest earned in their nine months results for the period ended September 30, 2017 (9M17), averaged across Nigerian banks rated by Fitch, compared with 23 per cent in 2016.

“By end-September 2017, government securities including treasury bills represented more than 15 per cent of the banks’ assets as new lending fell, reflecting weak credit demand, tighter underwriting standards and banks’ reluctance to extend new loans as they focused on extensive restructuring of troubled oil-related and other portfolios,” Fitch stated.

According to the agency, even the country’s largest banks cut back on new lending last year, with Guaranty Trust Bank’s (GTB) stock of outstanding loans falling 10 per cent in the nine months results for the period ended September 30, 2017, FBN Holdings’ by 4.6 per cent, Zenith Bank’s by 3.7 per cent and Access Bank’s by 1.1 per cent.

But while the statement by Fitch showed that United Bank for Africa’s loan book grew 5.6 per cent, it pointed out that it was likely driven by non-Nigerian lending, as the bank operates in 22 other African countries.

The CBN’s latest issuance schedule showed that there would be N1.1 trillion ($3.6 billion) of rollovers in 1Q18 against N1.3 trillion of maturing bills. In 2017, rollovers fully covered maturing bills.

It added: “Performance metrics at all banks will be affected by weak demand for lending, falling treasury bill yields, lower foreign-currency translation gains, and rising loan impairment charges, but the largest banks are best placed to withstand these challenges.

“Operating returns are still strong at GTB (9M17 operating return on average equity (ROAE): 37%), Zenith (28%), UBA (22%) and Access (20%), while FBN Holdings’ operating ROAE is lower (12%) but improving.

“However, some second-tier banks with a 9M17 operating ROAE of 4%-6% may struggle to remain profitable in 2018. Our 2018 rating outlook for the Nigerian banking sector is negative, reflecting continued fragility in the operating environment and the Negative Outlook on the sovereign’s “B+” rating.”

Meanwhile, the federal government raised N161.54 billion at a treasury bill auction on Wednesday after it received subscriptions for more than twice the amount on offer.

The CBN sold N115.85 billion of one-year debt at the rate of 14.30 per cent. It auctioned N11.77 billion and N33.93 billion naira respectively in three- and six- months maturities at 12.54 per cent and 13.92 per cent.

Total subscription stood at N388.50 billion, Reuters reported.

Investors bid as high as 18.6 per cent for the one-year paper. However, the government has been offering debt at lower yields to track declining inflation, which fell for the tenth month in November to 15.90 per cent.

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