No worries on banks’ profit slide

Some finance experts have allayed fears over the high reduction in profit being recorded by various banks in Nigeria in their audited accounts.

The affected banks attributed the decline in profit to the exceptional provision for margin loans and other exceptional provisions as demanded by the Central Bank of Nigeria, under the leadership of Sanusi Lamido.

Before the advent of Lamido, the new CBN governor, banks were reputed for declaring huge profits now at variance with the current huge losses, which makes the public suspect those previously audited accounts might have been adjusted to shore up confidence.

Fall in banks’ profit

United Bank for Africa (UBA) on Friday said its net profit dropped to ₦6.8 billion ($45.4 million) in the nine months to the end of June, down 76 percent from a year ago, the highest among so far released in terms of percentage losses.

The bank said it had made a provision of ₦21.28 billion for exceptional items as well as a ₦1.44 billion provision for other loan losses.

UBA is not alone in this class, as a number of other banks had earlier declared drops in their profit levels, arising from provisions for margin loans.

Oceanic International Bank Plc said on the same Friday that its net profit for its first half-year to the end of June 2009 fell 29 percent to ₦14.4 billion ($96 million) due to similar margin loan exposures for which it made 100 percent provisions.

Zenith Bank said last Tuesday that its net profit for the first nine months to the end of June was halved by margin loan provisioning. The bank posted a net profit of ₦10.62 billion for the nine months to the end of June, down 57 percent on the previous year.

Zenith said in a filing to the Nigerian Stock Exchange (NSE) that turnover rose 32 percent to ₦166.61 billion in the period, while it had made total provisions of ₦18.54 billion for exceptional items.

First Bank of Nigeria Plc, the first to declare profit loss under the new CBN policy of total disclosures, said earlier last month that its net profit fell by two thirds in its full year to the end of March 2009, due to a write down of ₦26 billion in stock market related transactions by one of its subsidiaries.

Skye Bank Plc is also suspected as likely to record a substantial drop in profit. A recent report released by Renaissance Capital, a firm of financial analysts, said, “We estimate the bank’s potential loss on its margin-loan book and downstream oil and gas exposures at ₦13.25 million.”

Expert opinions

Other factors that may have contributed to profit drop according to speculations by analysts include loan losses, interest rate contraction and operating cost rise, increase in the branch network and the corresponding rise in operating costs.

However, some experts believe the current depreciation of profits in banks should not be a source of worry. According to Bismark Rewane, “There is nothing extraordinary about this recent development. During depressions, companies’ performances are always weak. The provision they have to make for their bad and doubtful debts increases,” he said.

Mr. Rewane further explains that the situation was not meant to continue indefinitely, saying, “After the recession, they would write back these loans and then they can continue to declare increased profits. The situation is not only in Nigeria, it is a global issue. Banks everywhere are recording drops in their profit level,” he said.

“It is a welcome idea. It is good for the economy and for the banks too. The truth is that if you subject the banks to a stress test, they would pass because they are adequately covered and there is no threat of a systemic risk,” he said.

Ayo Teriba, a macroeconomist and CEO of Economic Associates, a finance institution which provides economic information required to spot new opportunities and risks in the Nigerian environment, said profit drops shouldn’t cause concern.

“Drop in the banks profit level shouldn’t cause concern. In fact, if they still have profits, you should congratulate them. Concerns would have arisen if the reverse was the case. If the banks still declared those high profits in this recession, then they should be asked where they got the profit from,” he said.