According to an article I read in the papers recently, Nigerian banks have made cumulative profits of about N362.2billion in the first 9 months of 2012 alone an 82% rise from the same period last year. The banks have also had the best of times in the stock market with the Banking Index rising 50.66% year to date compared to All Share Index which have risen by 26.9% year to date. The banks have also seen significant strengthening of their balance sheet following the bank wide rescue and liquidity provided by AMCON in the last two years. All of this is sweet to swallow if you believe all sweet drinks are healthy.
Banks make their money though lending and according to reports banks lending to the private sector has grown by a meagre 2.99% year to date. According to the last CBN economic report for August, lending to the private sector increased 3.9 percent year on year only and banks had a loan to deposit rate of 45.7% much lower than its self set target of 80%. So how then are the banks making money? Most analyst attribute their recent earnings to high yielding government bonds and securities which mostly have an interest rate of about 14% per annum. In addition, banks also resort to lending to the private sectors at high interest rates of between 20%-22%.
With the above, one then wonders why the banks should be short at a time when everything seems to be in their favour. AMCON has cleaned up their books, government is borrowing from them at rates above inflation, interest rate margins are as wide as ever thanks to single digit deposit rates and the CBN has helped create a buffer of cash less banking etc. Banks are however, different from any other business profits made today can be reclassified as losses tomorrow depending on how the economy swings. This is one risk factor banks know too well and can’t change. For example, if AMCON today decides that the so called toxic assets it purchased from banks are worse than implied, it will simply use its powers of recourse. The AMCON act empowers it to reclaim all or any part of the money paid to the banks in exchange for loans. Since the amount AMCON pays for toxic loans is determined by the strength of security backing such loans, banks who sell loans costlier than it should be face the danger of recourse. This will ultimately warrant a write off.
But most see the above scenario as rather unlikely. It can only be a system risk if AMCON itself were at risk which for now is inconceivable!!? But banks do not operate in isolation. You only need to look at the wider economy to know things aren’t as good as they seem. Banks make more money when the economy is thriving and vice versa. If you believe the economy is thriving and businesses are making massive profits then you might as well believe the profits banks are currently reporting. If you don’t then now may just be the right time to short….if you could.