ALTHOUGH many deposit money banks are putting finishing touches to their half year financial performance in readiness for their release this week, The Nigerian Tribune’s analysis of results for six lenders showed that their impairment charges/write backs increased to N144.6billion in the first half of 2017. This compares with N128.6 billion recorded in the corresponding period of 2016, representing an increase of N16billion.
But looking beyond the regular gross earnings which commercial banks like to showcase each time they release their results, a few profitability ratios can provide further clue to the impressive or non-impressive outing of the six banks that have released their results.
The lenders are: First Bank of Nigeria (FBN) Holdings, First City Monument Bank (FCMB), Union Bank, Sterling Bank, Diamond Bank and Zenith Bank plc.
Impairment charges are loans that may no longer be recovered especially those that had more exposure to upstream oil sub-sector, power sector and foreign currency loans.
However, when impairments are used for assets, it describes a reduction in the recoverable amount of such assets below their book value.
Despite its growth in profit, Zenith Bank ranked top with 198.5 per cent increase in its H1:2017 impairment charges from N14.2 billion in 2016 to N42.4 billion in the current period. FBN Holdings with N62.4billion impairment charges booked 10.7 per cent reduction when compared with N69.4billion recorded in half year 2016; FCMB’s N10billion is a 26.1 per cent reduction in credit impairment charges from N13.5 billion in the corresponding period of 2016. Union Bank recorded 36.8 per cent decrease, but booked N5.4billion credit impairment charges in 2017 compared with N8.8billion recorded last year. In the same way, Sterling Bank booked N4.1billion impairment charges in the first six months of 2017 compared with N3.7billion recorded last year, while Diamond Bank’s impairment charges increased by 6.9 per cent to N20.3billion from N19billion recorded last year.
Impairment is specifically used to describe a reduction in the recoverable amount of a fixed asset below its book value. Its negative effect on profit is always high.
Loan to Deposit Ratio
Similarly, analysis of loan to deposit ratio which is used to calculate a lending institution’s ability to cover withdrawals made by its customers, showed that the six lenders under coverage gave out more than half of their deposits in the form of interest-bearing loans, some of which eventually went bad.
Investors, who are afraid of high risk, frown at high loan to deposit ratio because in most cases the banks’ loans are not always repaid even though the concerned bank, issuing out more of its deposits in the form of interest-bearing loans, may under normal situations generate more income.
With loan to deposit ratio at 76.6 per cent in H1: 2017, FBN Holdings gave out more loans from its deposits compared to 71.8 per cent booked in 2016. At 95.7 per cent in the first six months of the year, Sterling Bank tops five other lenders that gave out more of their deposits in form of loans. This is even as it increased the ratio from 82.1 per cent recorded in 2016.
Also, at 91. 5per cent in the first six months of the year, FCMB came next to Sterling Bank among the six lenders in terms of loan to deposit ratio, even though it tried to reduce it from 96.7 per cent recorded in 2016. Union Bank’s loan to deposit ratio stood at 55.5 per cent, which is a reduction from 67.7 per cent recorded in 2016.
Diamond Bank’s loan to deposit ratio came down a bit from 71.7 per cent recorded in 2016 to 70.2 per cent in the year under review, while Zenith Bank followed suit with loan to deposit ratio of 73.5 per cent in the current year compared to 76.7 per cent recorded in the preceding year.
A high loan to deposit ratio is a problem when these loans are impaired because, the bank has to repay deposits on request, so having a ratio that’s too high puts the bank at high risk. A very low ratio means that the bank is at low risk, but it also means it is not using its assets to generate income and may even end up losing money.
Profit after Tax
Although banks continued to reap the benefits of higher interest rate and yield environment in the fixed income market, their Profit after Tax (PAT) has continued to take a hit from huge impairment charges. For instance, First Bank of Nigeria Holdings recorded a N6.4 billion (17.9%) decline in PAT from N35.9 billion booked in 2016 to N29.5 billion in the first 6 months of 2017. FCMB’s PAT declined by N12.7 billion to N3.0 billion in the first half of 2017 from N15.7 billion in the corresponding period of 2016. Union Bank’s PAT slightly improved to N9.2 billion from N8.8 billion recorded last year partly because it booked a 36.8 per cent decrease in impairment charges and the lender did not give out too much of its deposits as loans.
Sterling Bank’s PAT decreased to N3.8 billion in H1: 2017 from N4.0 billion recorded in 2016. In the same way, Diamond Bank recorded slight improvement in its PAT from N9.1 billion in H1: 2016 to N9.3 billion in H1: 2017 while Zenith Bank recorded most impressive PAT of N75.3billion in the first half of 2017, compared to N35.5 billion recorded in 2016.
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