Banks ignore negative returns to increase holdings of government securities in Q1

Nigeria’s biggest banks were more concerned about their exposure to risk than the return on their investment in the first quarter of 2021, as they considered government securities over lending.

Despite the increase in negative return, the five tierone lenders raised their holdings in government securities by 46.49 percent in the first three months of this year as against the 11.72 percent rise in their loans and advances to customers.

This mirrors their view of the macroeconomy as they fear increasing their nonperforming loans (NPLS), investment analysts said.

“Based on the yield environment, banks took more position in investment securities that are secured,” Ayodeji Ebo, head, retail investment, Chapel Hill Denham, said, adding that banks would lend based on how economic activities improve.

After a two-year trend of continued decline in NPLS since Q3 2018, the Nigerian banking industry ended 2020 with a 16.04 percent increase in NPLS, which accounted for 6.02 percent of gross loans.

Analysis of the Q1 financial report of the five biggest lenders in Africa’s largest economy shows that their holdings in investment securities increased by N2.61 trillion to N8.23 trillion in the first quarter of 2021, from N5.63 trillion recorded in the corresponding quarter of 2020.

Compared to the N7.86 trillion reported in the fourth quarter of last year, the banks’ investment in government securities like bonds and treasury bill increased by N370 billion. The N8.23 trillion reported in the review period is the highest on record since Businessday started tracking the data in 2015.

On the other hand, the banks’ loans and advances to customers were up N1.3 trillion or 11.72 percent, 34.77 percentage points less when compared with the 46.49 percent rate by which the lenders increased their investment securities. The five banks gave loans worth N12.77 trillion to their customers in Q1 2021, N1.34 trillion higher than the N11.43 trillion they gave the year before.

On-quarter-on comparison, the banks’ lending was up 2.74 percent from N12.43 trillion in Q4 2020 to N12.77 trillion in Q1 2021.

“Yields improved this year. So, as long as they get the better return they wouldn’t want to take much risk with lending,” Ebo said.

After hitting a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free Treasury bills (T-bills) climbed to more than one year high in the first quarter of 2021.

The rates on the 364-day Federal Government shortterm T-bills rose to 9 percent from 1.5 percent at the beginning of the year.

But with Nigeria’s 18.17 inflation rate in March, the highest in four years, the real return on the federal government less risky short term debt instrument depreciated further when compared to March 2020 when the inflation rate stood at 12.26 percent.

While inflation-adjusted return on the shorter 91-day and 182-day bills were -9.77 percent and -8.48 percent, respectively, in the first quarter of 2020, the real return on the bills dropped further to -16.17 percent and -14.67 percent in the comparable quarter of 2021, thanks to Nigeria record-high 18.17 inflation rate in March.

The trend was the same for the longer 364-day bill. From a -6.96 percent real return on investment last year, the bill gave investors -9.17 percent in the same period of this year.

As the interest rate is trying to play catch up, inflation is moving upward too, Yinka Ademuwagun, Research Analyst, FMCGS, United Capital Plc said in March.

“The real return is still clearly negative because inflation is rising faster,” Ademuwagun said.

However, the recent uptick in the yields on the short term government instrument is helping to comfort investors against the rate at which the high inflation rate is impacting their returns.