Tier 2 Banks Face Increased Competition, Aggressive Loan Growth, Says Report

Nigerian Tier 2 banks are currently striving to remain competitive amidst the tough banking landscape, a report has shown.

The report stated that the bigger banks, with larger balance sheets, can compete more favourably for quality loans and generally have better access to cheap retail deposits due to their reputation for safety and in most cases, a wider reach.

The CSL Stockbrokers Limited, a division of First City Monument Bank  (FCMB), United Kingdom, stated this in the report made available to THISDAY. The research report was focused on five Tier 2 banks namely: Diamond Bank Plc, Stanbic IBTC Limited, Skye Bank Plc, Fidelity Bank Plc and Sterling Bank.

The Central Bank of Nigeria’s (CBN’s) new tariff structure and the recent increase in the cash reserve ratio (CRR) on public sector deposits from 12 per cent to 50 per cent are all expected to impact bank’s earnings in 2013.

According to the report, cost of funds is an area where the top tier  banks have historically had a major competitive advantage over the 2nd tier banks, due to their access to a wider pool of cheap retail deposits. “Funding costs have generally been on the rise since last year on the back of the CBN’s continued tight monetary policy stance and the need for debt funding. 

“Added to this, the newly introduced 50 per cent CRR on public sector funds and the CBN’s new tariff structure which took effect from April 2013 (which specifies the payment of a minimum of 30% of the monetary policy rate per annum on savings deposits), all point to increasing funding costs,” it  added.

Continuing, it stated: “Although we recognise that the 2nd tier banks that we cover in this report have all been making deliberate efforts to reduce funding costs, we still expect them to increase year-on-year in full year 2013, albeit only marginally in some cases.
“The expectation of a general increase is also exacerbated for the 2nd tier banks as  they have all sourced dollar funding or are in the process of doing so either  to enhance capital or fund dollar lending.”

It anticipated that the recently introduced 50 per cent CRR on public sector deposits will strain interest income in the second half of 2013 as it will sterilise a percentage of deposits that would otherwise have earned interest.

“The levy imposed by the Asset Management Company of Nigeria (AMCON), which was set up to acquire bad loans from the banking system, was increased from 30bps to 50bps commencing in 2013. This is expected to increase the operating expenses of the banks by about 3-4 per cent in 2013.

“In addition, the CBN regulations stipulating that ATM costs may no longer be recouped from customers will add to expenses in 2013. Though  the effect is expected to be relatively small, the banks will still have to bear the burden of the charges.
“We expect the impact of this to be felt most by the banks with fewer ATM channels and a large number of issued cards. Banks with large ATM channels and low ATM downtime and with fewer issued cards will be the least affected in our view,” it added.

Source: ThisDayLive