Four Nigerian banks may lose N88 billion in
revenue to the proposed phase out of
Commission on Turnover, COT, charges. This
may give rise to a minimum rate on savings
accounts that could raise interest expense by
the banks to N22 billion in 2013, a recent report by HSBC on four out of the twenty-four
Nigerian banks has revealed. The report, which has been circulated among
foreign portfolio investors, said that banks
operating in the country will struggle to fully
offset negative pressure on revenues as cost
of risk starts to increase as loan growth
recovers due to tighter regulation of fees and cost of savings account since the beginning of
the year. The report focused its search light on
First Bank, GtBank, UBA and Zenith Bank. The HSBC report said that Nigerian banks will
be under stronger pressure to improve
operating costs in order to preserve returns.
The report singled out Zenith Bank as the bank
that is most sensitive to rising cost of savings
account and can hold its cost better than its competitors, as well as having better cost
control and asset quality. The report said that better cost control is the
only way for Nigerian banks to mitigate
reduction in the sector profitability, but high
fixed cost base would limit efficiency gains. As an advisor to several institutional investors
the HSBC report said, “High fee/loan ratios and
cheap, inflation adjusted, funding costs are key
profitability drivers of Nigerian banks. A new
set of regulations on banking charges
effective from 1st April 2013 has transformed the profitability structure of the Nigerian banks
we cover. A gradual phase-out of commission
on turnover (COT) fees and the introduction of
a minimum rate on savings deposit accounts, in
our view, should have the strongest negative
impact on earrings. Continuing the report said “Tighter regulations
should encourage banks to focus more on cost
optimisation and loan growth. We think that not
all banks can mitigate increasing earnings
pressure. We calibrate the cost of new
regulations for each bank we cover and how they can mitigate such pressure. Phase-out of
COT fees will result in revenue loss of N88
billion, 10 per cent of 2012 combined revenue.
The gradual elimination of COT fees to 0 by
2016 from N5per N1000 in 2012 should result
in N88 billion in revenue losses for the four banks under our coverage. This is equivalent to
10 per cent of combined revenue banks earned
in 2012.” According to HSBC, in 2010, First Bank earned
N34 billion from COT. This rose to N39 billion in
2011, N48 billion in 2012 and is estimated to
drop to N33 billion in 2013 and further to N24
billion in 2014 and N14 billion in 2015. Gtbank
the report said earned N36 billion as revenue from fees in 2010, N35 billion in 2011,
N37billion in 2012, N25billion in 2013, N18
billion in 2013 and N10billion is the expected
revenue from COT in 2014. According to the report, UBA in 2010 generated
N27 billion from COT, N31 billion in 2011, N35
billion in 2012, N23 billion in 2013 and N18
billion in 2014. Zenith Bank Plc, the report said, generated N46
billion from COT in 2010, N57 billion in 2011,
N55 billion in 2012 and N43 billion is expected
in 2013.
HSBC said that COT fees make up the bulk of
fee income of Nigerian banks, especially at FBN. Commission on turnover applies to customer
induced debit transactions on current
accounts. In its July 2012 draft on bank
charges, the Central Bank of Nigeria noted that
most banks in the country charged N5 per
N1000 transaction. According to HSBC Nigerian banks main
profitability pillars are fees and funding. It said
“Nigerian and South African banks have highest
fee loan ratios among markets covered at
HSBC. We estimate that over time Nigerian
banks’ fee loans ratio will normalise between that of Egyptian and South African banks GCC
banks on the other hand have lowest downside
risks to fee income they earn. Nigerian banks earned 2.2 per cent of their
loans in commission on turnover (COT) fees in
2012, this was an increase from 1.9 per cent in
2010 We factor in COT fee structure as per
CBN guidelines effective 1″ April 2013, i.e. a
gradual phase-out of fee income . We fully eliminate COT fee income by 2016. The
resulting fee loan ratio drops to 2.5 per cent in
2016 from 5 per cent in 2012. We adjusted
asset yields and funding costs for inflation in
each country to reveal how banks earn their net
income margin. Clearly, most banks generate earnings by paying below inflation for their
funding. Nigerian, Saudi, Egyptian and
Lebanese banks stand out. Asset yields do not
cover the rate of inflation in Nigeria, Saudi and
Lebanon. Nigerian banks report highest net
income margin mainly due to very cheap funding cost. “To arrive at our estimate of turnover volume
we divided 2012 COT fee income by N5. We
assumed that turnover volume will grow by
15-20 per cent per annum in the forecast
period. Our COT fee income forecast is a
product of turnover volumes and the COT fee ofN3 in 2013, N2 in 2014, and NI in 2015 (per
CBN guidelines). The report further said “The large volume of
savings accounts, which varies between 8 per
cent and 23 per cent of total deposits means
that banks will have to increase interest
expenses as CBN now requires them to pay a
minimum of 30 per cent of monetary policy rate (MPR). With MPR at 12 per cent now, this is
equivalent to 3.6 per cent. Before the
introduction of the minimum rate on savings
accounts, we estimate that FBN paid I per cent
on savings accounts. GTbank does not break
down its interest expense on savings accounts”. The HSBC report also said “We estimate that
the interest rate here was 2.5 per cent in 2012.
In the case of Zenith, we estimate cost of
savings accounts was I per cent. Zenith and
FBN paid the lowest rate on savings accounts in
our coverage. FBN, however, has the highest ratio of savings accounts in its customer
deposits, 23 per cent. This makes it most
sensitive to any increase in cost of savings
accounts. UBA stopped disclosing a breakdown
of its deposit expenses in 2012. We think that
UBA paid 1.3 per cent on savings accounts in 2012, in line with 2011”. Combined interest expenses on savings
accounts should increase by N2l.7billion in
2013, with the strongest increases at FBN and
UBA, as per our estimate. Funding costs will
increase in 2013. FBN’s funding cost advantage
relative to peers should be less than before. “In our sector initiation report Save now to
invest , 14thSeptember 2012, we argued that
Nigerian banks have plenty of room to improve
costs. An expected attrition in fees and upward
pressure on funding costs should force banks
to control costs better. There is in fact little room for banks to maneuver on costs as 40-50
per cent of the cost base is fixed. Our re-
examination of the cost structure of the banks
we covered suggests that UBA and Zenith were
the two banks which made the strongest
progress in controlling costs. This can be seen in headcount per branch numbers in the case
of Zenith and in the cost to income ratios of
both banks. Zenith and UBA were the only two
banks to cut staff expenses in 2012. For
comparison, staff costs at First Bank and
GTbank increased on the average by 23 per cent year on year in 2012. The report said “We forecast further cost
efficiency gains at UBA and Zenith, l per cent
of total assets between 2012 and 2015. GT
Bank already has a good cost structure, with
not much room for potential improvement, in
our view. We forecast efficiency improvement at FBN, UBA and Zenith. GT Bank already has
lowest cost income ratio. FBN still
demonstrates the highest cost per employee.
“However we think this metric will be difficult
to reduce to the industry average. We believe
higher staff cost per employee could be owing to the high headcount allocation at a
headquarter level, where staff cost, tend to be
higher”. The report said that AMCON levy puts floor to
cost cutting in Nigerian banks. It stated “We
assume 0.5 per cent in AMCON levy for next 5
years. Our 2013 forecasts reflect an increased
AMCON levy which is now 0.5 per cent of total
assets, up from 0.3 per cent a year ago. The negative equity position of AMCON, $19billion
as at December 2012, suggests that the levy is
unlikely to decrease going forward, unless the
Government recapitalises it, which we think is
unlikely”. HSBC Research estimates a 7 per cent capital
shortfall in AMCON. It said “For now we assume
that the Government fully transfers the high
cost of the AMCON recapitalisation to the
banking sector. At a 0.5 per cent, AM CON levy
and a 15 per cent per annum increase in banking assets, we calculate it would take 23
years for AMCON to be recapitalised in full. Our
calculation assumes a 0.5 per cent AMCON
levy. “If one assumes that AMCON needs to
recapitalise to $I billion, which puts its equity-
to-asset ratio at a modest 7 per cent, AMCON
would require $20billion in new capital. This is
equivalent to roughly half of Nigeria’s foreign
currency reserves. In the absence of recapitalisation of AMCON by the Government,
the banking sector has little room for large
systemic defaults”.
revenue to the proposed phase out of
Commission on Turnover, COT, charges. This
may give rise to a minimum rate on savings
accounts that could raise interest expense by
the banks to N22 billion in 2013, a recent report by HSBC on four out of the twenty-four
Nigerian banks has revealed. The report, which has been circulated among
foreign portfolio investors, said that banks
operating in the country will struggle to fully
offset negative pressure on revenues as cost
of risk starts to increase as loan growth
recovers due to tighter regulation of fees and cost of savings account since the beginning of
the year. The report focused its search light on
First Bank, GtBank, UBA and Zenith Bank. The HSBC report said that Nigerian banks will
be under stronger pressure to improve
operating costs in order to preserve returns.
The report singled out Zenith Bank as the bank
that is most sensitive to rising cost of savings
account and can hold its cost better than its competitors, as well as having better cost
control and asset quality. The report said that better cost control is the
only way for Nigerian banks to mitigate
reduction in the sector profitability, but high
fixed cost base would limit efficiency gains. As an advisor to several institutional investors
the HSBC report said, “High fee/loan ratios and
cheap, inflation adjusted, funding costs are key
profitability drivers of Nigerian banks. A new
set of regulations on banking charges
effective from 1st April 2013 has transformed the profitability structure of the Nigerian banks
we cover. A gradual phase-out of commission
on turnover (COT) fees and the introduction of
a minimum rate on savings deposit accounts, in
our view, should have the strongest negative
impact on earrings. Continuing the report said “Tighter regulations
should encourage banks to focus more on cost
optimisation and loan growth. We think that not
all banks can mitigate increasing earnings
pressure. We calibrate the cost of new
regulations for each bank we cover and how they can mitigate such pressure. Phase-out of
COT fees will result in revenue loss of N88
billion, 10 per cent of 2012 combined revenue.
The gradual elimination of COT fees to 0 by
2016 from N5per N1000 in 2012 should result
in N88 billion in revenue losses for the four banks under our coverage. This is equivalent to
10 per cent of combined revenue banks earned
in 2012.” According to HSBC, in 2010, First Bank earned
N34 billion from COT. This rose to N39 billion in
2011, N48 billion in 2012 and is estimated to
drop to N33 billion in 2013 and further to N24
billion in 2014 and N14 billion in 2015. Gtbank
the report said earned N36 billion as revenue from fees in 2010, N35 billion in 2011,
N37billion in 2012, N25billion in 2013, N18
billion in 2013 and N10billion is the expected
revenue from COT in 2014. According to the report, UBA in 2010 generated
N27 billion from COT, N31 billion in 2011, N35
billion in 2012, N23 billion in 2013 and N18
billion in 2014. Zenith Bank Plc, the report said, generated N46
billion from COT in 2010, N57 billion in 2011,
N55 billion in 2012 and N43 billion is expected
in 2013.
HSBC said that COT fees make up the bulk of
fee income of Nigerian banks, especially at FBN. Commission on turnover applies to customer
induced debit transactions on current
accounts. In its July 2012 draft on bank
charges, the Central Bank of Nigeria noted that
most banks in the country charged N5 per
N1000 transaction. According to HSBC Nigerian banks main
profitability pillars are fees and funding. It said
“Nigerian and South African banks have highest
fee loan ratios among markets covered at
HSBC. We estimate that over time Nigerian
banks’ fee loans ratio will normalise between that of Egyptian and South African banks GCC
banks on the other hand have lowest downside
risks to fee income they earn. Nigerian banks earned 2.2 per cent of their
loans in commission on turnover (COT) fees in
2012, this was an increase from 1.9 per cent in
2010 We factor in COT fee structure as per
CBN guidelines effective 1″ April 2013, i.e. a
gradual phase-out of fee income . We fully eliminate COT fee income by 2016. The
resulting fee loan ratio drops to 2.5 per cent in
2016 from 5 per cent in 2012. We adjusted
asset yields and funding costs for inflation in
each country to reveal how banks earn their net
income margin. Clearly, most banks generate earnings by paying below inflation for their
funding. Nigerian, Saudi, Egyptian and
Lebanese banks stand out. Asset yields do not
cover the rate of inflation in Nigeria, Saudi and
Lebanon. Nigerian banks report highest net
income margin mainly due to very cheap funding cost. “To arrive at our estimate of turnover volume
we divided 2012 COT fee income by N5. We
assumed that turnover volume will grow by
15-20 per cent per annum in the forecast
period. Our COT fee income forecast is a
product of turnover volumes and the COT fee ofN3 in 2013, N2 in 2014, and NI in 2015 (per
CBN guidelines). The report further said “The large volume of
savings accounts, which varies between 8 per
cent and 23 per cent of total deposits means
that banks will have to increase interest
expenses as CBN now requires them to pay a
minimum of 30 per cent of monetary policy rate (MPR). With MPR at 12 per cent now, this is
equivalent to 3.6 per cent. Before the
introduction of the minimum rate on savings
accounts, we estimate that FBN paid I per cent
on savings accounts. GTbank does not break
down its interest expense on savings accounts”. The HSBC report also said “We estimate that
the interest rate here was 2.5 per cent in 2012.
In the case of Zenith, we estimate cost of
savings accounts was I per cent. Zenith and
FBN paid the lowest rate on savings accounts in
our coverage. FBN, however, has the highest ratio of savings accounts in its customer
deposits, 23 per cent. This makes it most
sensitive to any increase in cost of savings
accounts. UBA stopped disclosing a breakdown
of its deposit expenses in 2012. We think that
UBA paid 1.3 per cent on savings accounts in 2012, in line with 2011”. Combined interest expenses on savings
accounts should increase by N2l.7billion in
2013, with the strongest increases at FBN and
UBA, as per our estimate. Funding costs will
increase in 2013. FBN’s funding cost advantage
relative to peers should be less than before. “In our sector initiation report Save now to
invest , 14thSeptember 2012, we argued that
Nigerian banks have plenty of room to improve
costs. An expected attrition in fees and upward
pressure on funding costs should force banks
to control costs better. There is in fact little room for banks to maneuver on costs as 40-50
per cent of the cost base is fixed. Our re-
examination of the cost structure of the banks
we covered suggests that UBA and Zenith were
the two banks which made the strongest
progress in controlling costs. This can be seen in headcount per branch numbers in the case
of Zenith and in the cost to income ratios of
both banks. Zenith and UBA were the only two
banks to cut staff expenses in 2012. For
comparison, staff costs at First Bank and
GTbank increased on the average by 23 per cent year on year in 2012. The report said “We forecast further cost
efficiency gains at UBA and Zenith, l per cent
of total assets between 2012 and 2015. GT
Bank already has a good cost structure, with
not much room for potential improvement, in
our view. We forecast efficiency improvement at FBN, UBA and Zenith. GT Bank already has
lowest cost income ratio. FBN still
demonstrates the highest cost per employee.
“However we think this metric will be difficult
to reduce to the industry average. We believe
higher staff cost per employee could be owing to the high headcount allocation at a
headquarter level, where staff cost, tend to be
higher”. The report said that AMCON levy puts floor to
cost cutting in Nigerian banks. It stated “We
assume 0.5 per cent in AMCON levy for next 5
years. Our 2013 forecasts reflect an increased
AMCON levy which is now 0.5 per cent of total
assets, up from 0.3 per cent a year ago. The negative equity position of AMCON, $19billion
as at December 2012, suggests that the levy is
unlikely to decrease going forward, unless the
Government recapitalises it, which we think is
unlikely”. HSBC Research estimates a 7 per cent capital
shortfall in AMCON. It said “For now we assume
that the Government fully transfers the high
cost of the AMCON recapitalisation to the
banking sector. At a 0.5 per cent, AM CON levy
and a 15 per cent per annum increase in banking assets, we calculate it would take 23
years for AMCON to be recapitalised in full. Our
calculation assumes a 0.5 per cent AMCON
levy. “If one assumes that AMCON needs to
recapitalise to $I billion, which puts its equity-
to-asset ratio at a modest 7 per cent, AMCON
would require $20billion in new capital. This is
equivalent to roughly half of Nigeria’s foreign
currency reserves. In the absence of recapitalisation of AMCON by the Government,
the banking sector has little room for large
systemic defaults”.
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