How Do Banks Make Money in Nigeria – Analysis of Banking Stocks In Nigeria Stock Market and How They Make Money From Loan, Treasury Bills and FGN Bonds
Understanding the business of banking isn’t an option for investors looking for good banking stocks to buy but a required process that will help you uncover and weigh profit opportunities and inherent risks.
It is easier to say that banks accept deposits from individual and corporate customers and lend to borrows at a higher rate or invest in fixed income securities but knowing which of these categories accounts for 80-90 of the profits declared is critical to selecting the right bank that is positioned to make more money and pay higher dividend per share.
A bank can be loan driven if it gives most of the money generated as deposits to qualified borrowers at a higher rate while paying less as interest expenses. On the other hand, an investment-driven bank is one that is constantly increasing and investing deposits in fixed income securities like CBN Treasury bills, FGN bonds or other risk-free securities. The return on these two (2) income-opportunities is called “interest income”
As more banks deploy advanced technology infrastructures to ease transaction processes like payments, transfers, account inquiry and statements, the fees and commissions, earned on transactions performed on their platforms, are called non-interest income.
I won’t be talking about non-interest income.
How is your bank making money?
Before investing in a bank’s stock, I always take my time to understand their key revenue drivers and align with banks that are well positioned to grow their bottom line based on economic realities.
As of this writing, some banks had just released their 9-month results and it makes more sense to use their recent results to know whether they are loan or investment-driven, this will help me analyse their revenue opportunities and industry risks.
The three key metrics to focus on are the customer deposits, loan to deposits, and loan to assets ratio.
- Customer deposit reveals the cash held on behalf of its customers, both savings, current and term deposits.
- Loan to deposit ratio shows the proportion of the customer deposit that is advanced to customers at a higher rate.
- Loan to asset ratio shows the proportion of the bank’s total asset that is advanced to customers.
Guaranty Trust Bank
GTB in its Q3 results reported a total asset of N3.4tr against N3.3tr in 2017. A breakdown of the total asset showed that N1.27tr was advanced to customers compared to N1.44tr in the previous comparable period, a decrease of 11%.
The bank’s loan/asset fell from 43% to 37% which shows that it is cautious in its lending to the private sector. Investment assets stood at N598 billion against nil figure in 2017.
GTB generated more cash as the deposit grew from N2tr to N2.2tr.
Loan to deposit ratio, a metric that tells us the percentage of customer’s deposit that is advanced to borrowers, fell from 72% to 57%.
While GTB is still a loan driven bank, we can easily deduce that the bank is lowering exposure to loan risk and investing more in fixed income securities.
Watch out for rising yield as inflation and economic risks increase; this might be another opportunity to key into the bank’s stock in 2019.
Zenith bank, in its Q3 results, grew its customers’ deposit to N3.2tr (from N3tr) which is 6% growth.
The total asset as of September 2018 was N5.6tr, up from N5.1 in 2017. A breakdown of the bank’s asset showed that it has reduced its exposure to loans and advanced to N1.8tr, from N2.1. Loan/asset ratio as 25% (compared to 41% in the previous quarter).
The loan to deposit also fell from 70% to 56%.
The bank, from my analysis, is also cautious of private sector lending, rather it is gradually investing more in CBN treasury bills as evident in additional N100b injected in the short-term securities.
United Bank for Africa (UBA)
The bank in its Q3 result reported a total asset of N4.5tr, up from N4 in 2017. A break down of the bank’s asset showed that loan and advances to customers fell from N1.6tr to N1.5tr while investments securities were shored up to N1.5billion against N1.2 billion.
Loan to assets ratio is at 33% against 40% in the previous comparable period.
Based on the Customers’ deposit, which grew from N2.17tr to 3.1, loan to deposit ratio stands at 48% (compared to 59% in 2017).
The bank, as of this writing, reported a total asset of N4.3tr against N4.1tr in the previous comparable period. Out of this value, loan and advances stood at N1.97tr, a slight decrease from N1.99; the bank is still focused on private sector lending.
Based on data presented, loan to asset ratio fell from 48% to 45%
Deposits from customers increased from N2.2tr to N2.4, hence, loan to deposit ratio was 82% as it maintains stance on increasing interest income from loan portfolio.
Investment securities as at the reporting period were N446 billion, up from N276 billion.
In summary, Access bank is more of a loan-driven bank but gradually building up its investment securities to take advantage of the free money in the fixed income market.
From my analysis, you will notice that Tier 1 banks are lowering exposure to loan risks, and expanding their fixed income portfolio. A smart investor should pay attention to economic risks, the biggest driver of yield in the fixed income market.
When economic risks are high, investors clamour for high yield on FBN bonds and CBN treasury bills to compensate for the risk and such earn more.
As banks build their fixed income portfolio, it is a clear indication that they want to make more money from the fixed income market and less from loan and advances, since it comes with a greater risk.