Higher Operating Costs Will Shrink Banks’ H1 Profit Margins – Experts
Despite the impressive performance recorded in the first quarter of this year, the lingering Russian-Ukraine war and surge in price inflation will slow the bottom line performance of banks’ half-year earnings.
Banks’ operational costs will rise higher as the war is stoking energy inflation. This has not only impacted the price of diesel but the product has risen by 226.53 per cent, from N245 in June 2021 to N800 in June this year. “Surging energy cost remains a threat to bottom-line performance,” said Bismarck Rewane, the managing director/chief executive officer of Financial Derivatives Company Limited (FDC).
Analysis of 14 commercial banks’ Q1 unaudited financial statements shows increases in their operating cost, which rose by 23.24 per cent year-on-year, from a total of N324.13 billion in Q1 2021 to N399.47 billion in Q1 this year, lowering the banks’ profit before tax (PBT) by 18.51 per cent to N371.38 billion.
Coupled with the geopolitical and inflationary tensions, Nigeria is currently ranked 131 among 190 economies in the ease of doing business.
According to a report from the World Bank Group, the ease of doing business index ranks countries against each other based on how the regulatory environment is conducive to business operation and stronger protections of property rights. Economies with a high rank of one to 20 have simpler and friendlier regulations for businesses.
Other operating expenses or expenditure costs detail the company’s total operating expenses, excluding base management fees, incentive fees, organisation and offering expenses, financing fees and costs, interest expenses, brokerage commissions and extraordinary expenses.
It is a company’s key commercial activity in generating revenue, it highlights the level of the cost needed to generate revenue, and the main goal and an essential component of a company’s bottom line.
In the period under review, Union Bank of Nigeria’s operational costs rose by 4.05 per cent to N18 billion. This lowered the company’s PBT by -10.77 per cent to N5.8 billion
Guaranty Trust Holding Company and Fidelity Bank both narrowed their PBT by 1.12 per and 1.87 per cent to N54.29 billion and N10.32 billion respectively, after their expenditure costs swelled by 33.21 per cent and 17.99 per cent to N29.31 billion and N18.62 billion respectively.
Access Holdings and United Bank for Africa reported 8.46 per cent and 9.62 per cent in PBT to N65.13 billion and N44.48 billion, but their other operating expenses surged to N77.26 billion and N46.32 billion respectively. In fact, the analysis shows that Access Bank, in the period under review, incurred the highest expenditure cost.
While Zenith Bank’s PBT rose minimally by 11.42 per cent to N67.99 billion, its other operating expenses ballooned by 22.68 per cent to N54.28 billion. Jazz Bank reported an 11.52 per cent rise in PBT to N1.09 billion but was brought lower by a 4.07 per cent rise to N1.52 billion in its operational costs.
Unity Bank’s operational expenses rose by 22.96 per cent to N3.32 billion, leaving the bank to record a 20.47 per cent to N944.85 million in PBT.
Ecobank Transnational Incorporated’s PBT, which rose by 29.07 per cent to N52.07 billion, was weakened by a 9.23 per cent rise to N47.74 billion in its other operating expenses.
While FCMB Group reported a 42.41 per cent to N6.02 billion in its PBT, its operating expenses trimmed the figure after increasing by 18.02 per cent to N7.598 billion. Also, Sterling Bank’s PBT which of 49.34 per cent to N3.74 billion, was lowered by a 28.59 per cent rise to N6.22 billion in the bank’s operating expenses.
While Stanbic IBTC Group reported 61.41 per cent to N19.599 billion in PBT, its other operating expenses weighed on the figure by 32.96 per cent to N23.23 billion.
FBN Holdings would have doubled its PBT but its operating costs, which rose by 41.15 per cent to N59.31 billion, brought it to a 93.55 per cent to N36.59 billion.
Wema Bank reported the highest percentage growth in PBT, surging by 118.95 per cent to N3.30 billion but this figure was largely reduced by it 25.16 per cent rise in the operating expenses to N6.75 billion in the review period.
According to the National Coordinator of the Progressive Shareholders Association, Mr Boniface Okezie, every serious Investor should be worried when a company where he or she is making huge provisions in respective of bad debts or penalties are paid to regulatory bodies in the name of fine.
Okezie said this to express how concerned shareholders are to the sum incurred by banks in their operating expenses. “Indeed one must worry, even if its operating expenses are high because doing business is too high nowadays in Nigeria.”
He asserted that the banks were not finding it easy on diesel prices to run on their generators, considering the numbers of branches some of the banks have. He said, “Putting that together is enormous.”
What will happen is that at the end of their financial year, not much will be expected from the banks in dividends declaration to shareholders, Okezie explained.
He added that some banks would also navigate all the challenges when they re-adopt prudent management in carrying out their day-to-day business, and still pay a good dividend at the end of a financial period.
“It (Paying good dividend) is going to be possible, trust me, some banks and companies will do so,” the PSA national coordinator said.
Meanwhile, the World Bank Group, in its ‘Nigeria Development Update June 2022’ explained that Nigeria’s banking system proved resilient in the face of COVID-19 but noting that the operating environment for banks and firms has become more challenging in recent times as a result of the fallout from the war.
“Ukraine drives inflation higher, increasing production costs and the cost of borrowing through higher rates. Thus, loan quality over the next several quarters is likely to deteriorate, but it is not expected to threaten the banking system’s stability, as capitalization levels remain healthy overall. The NPLs ratio fell to 4.8 per cent of gross loans in February 2022 (from 6.4 per cent in Q2-2021),” the bank stated.
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