Ratings agency Fitch, in a recently released report, is of the opinion that profits made by Nigerian banks may drop in 2018, due to a slow down in the rate at which treasury bills are issued by the federal government.
Central Bank of Nigeria (CBN) latest issuance schedule shows NGN1.1 trillion (USD3.6 billion) of rollovers in 1Q18 against NGN1.3 trillion of maturing bills. The reduction in roll overs indicates the apex bank is issuing fewer treasury bills.
2018 could be a challenging one for banks
While the country’s economy has recovered from recession, growth remains weak. One time earnings on such as foreign exchange revaluation gains are no longer present. Interest rates are also expected to trend lower going forward.
Bigger banks will do better
Tier one banks are much likely to fare better however. Tier one banks in the country are the most capitalized and include First Bank, UBA, GT Bank, Access Bank and Zenith Bank.
Return on average equity (ROAE) for tier one banks are over 20% compared to an ROAE of 4-6% for some tier two banks. ROAE is net income divided by average shareholders equity.
What are treasury bills ?Â
Treasury bills are short dated fixed income securities issued by the government with a tenor of 91 days, 182 days and 364 days respectively. They have zero risk as the government is not expected to default. Â Interest rates were as high as 20% for one-year treasury bills, before dropping to 15% in the latter half of the year. .
Commercial banks are also expected to implement provisions of IFRS 9 this year, which means they would have to make provisions for both impaired loans and loans they expect to go bank.
Fitch Ratings Inc, was founded by John Knowles Fitch on December 24, 1914. The company is one of the big three rating agencies in the world. The other two being Moody’s and Standard and Poors.
