Deposit money banks (DMBs) in the country could be bracing for fresh pressure on their profitability as the Federal Government seems set to intensify its debt management strategy, findings by New Telegraph have revealed.
Specifically, Director-General, Debt Management Office (DMO), Patience Oniha, announced on January 25, that government was considering raising $2.5 billion through Eurobonds in the first quarter of this year to refinance a portion of its domestic Treasury bill portfolio at lower cost.
In a statement it subsequently issued to shed more light on Oniha’s announcement, the DMO explained that the purpose of the proposed Eurobond sale was to rebalance the Federal Government’s debt portfolio by increasing the external component while reducing the domestic component in line with the country’s debt management strategy.
The DMO had, in 2016, announced a new debt management strategy for the country, which has a target of 40:60 ratio for external to domestic debt.
According to the debt office, “the proceeds of the planned $2.50 billion will be converted to naira and used to redeem relatively more expensive domestic debt. This is expected to save about N64 billion per annum in interest cost, which will help to reduce the debt service/revenue ratio and free up the fiscal space for other priorities of government.”
It noted that last December, government redeemed matured Nigerian Treasury Bills (NTBs) with proceeds of $500 million Eurobonds issued in November 2017, adding: “Apart from saving about N17 billion per annum in debt service cost, there was also a significant drop in the Bid Rates at the Auctions of both NTBs and FGN Bonds in December 2017 and January 2018 from a range of 16per cent to about 13.5per cent.
“This translates to savings for government on new borrowings, reduction of pressure on lending rates in the economy with positive impact on job creation and poverty reduction,” the debt office stated.
Interestingly, the DMO’s announcement came on the heels of a report released by Fitch Ratings, which warned that Nigerian banks might find it more difficult to sustain profitability this year due to an expected decline in government borrowing through treasury bills.
It noted that the CBN’s latest treasury bills issuance schedule shows N1.1 trillion of rollovers in first quarter of 2018 (1Q18) against N1.3 trillion of maturing bills, pointing out that in 2017, rollovers fully covered maturing bills.
The rating agency stated that the slowdown in T-bill issuance will negatively impact lenders, as “Nigerian banks are highly reliant on net interest income for profitability and T-bills proved to be an important source of profits in 2017.”
It added: “We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018.”
Significantly, Fitch disclosed that interest on securities represented 30 per cent of total gross interest earned in nine months of 2017 (9M17), averaged across Nigerian banks rated by it compared with 23 per cent in the same period in 2016.
According to the agency, “by end-September 2017, government securities, including T-bills, represented more than 15 per cent of banks’ assets as new lending fell, reflecting weak credit demand, tighter underwriting standards and banks’ reluctance to extend new loans as they focused on extensive restructuring of troubled oil-related and other portfolios.”
It predicted: “Performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains and rising loan impairment charges, but the largest banks are best placed to withstand these challenges.”
Besides, it stated: “Operating returns are still strong at GTB (9M17 operating Return on Average Equity (ROAE): 37 per cent), Zenith (28 per cent), UBA (22 per cent) and Access (20 per cent), while FBNH’s operating ROAE is lower (12 per cent) but improving. However, some second-tier banks with a 9M17 operating ROAE of four per cent – six per cent may struggle to remain profitable in 2018.”
Corroborating Fitch, one of the leading Lagos-based financial advisory firms, Financial Derivatives Company (FDC) Limited, in a presentation released last week forecast that banks’ profitability will be impacted by the decline in treasury bills issuance as well as the low interest rate environment.
The firm stated: “Decline in T/bills issuance and low interest rate environment(will) put pressure on profitability”, adding : “Interest on securities represented 30 per cent of total gross interest earned in 9M’17 (and) Tier 1 and investment-inclined banks will be impacted the most.”
According to FDC, treasury bills stop rates will trend lower this month due to a reduced appetite for the government securities and investors shift attention to an equities market that has been buoyant in recent weeks.
It also predicted that primary treasury bills issue will be much lower than maturing bills and that the average stop rates of T/bills in February/March will: “decline to 11- 12 per cent p.a.”
However, despite the predictions of lower treasury bills rates, the CBN, on January 31, sold longer term treasuries at higher yield to draw funds. According to traders, the sale, which fetched the country N252.88 billion, saw the apex bank selling N177.22 billion of one-year debt at a rate of 13.7 per cent. It auctioned N6.09 billion of three-month debt at 12 per cent, and N69.57 billion of six-month maturity debt at 13.65 per cent.
Traders said some offshore funds participated at the auction, helping boost dollar liquidity on the currency window for investors to keep naira rates stable.
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