Banks Bring Down Cost-to-income ratios As Industry Margins Tighten

Wednesday,March 18, 2020/ 08:47PM/ Proshare Research / Header Image Credit: Proshare Research a

As back room discussionscontinue between banks over mergers and acquisitions, the issues of operating efficiencyand cost reduction have become hot button topics. The consequences of therecent Coronavirus outbreak have made the search for efficiency even more pressingas banks review growth strategies for 2020.

Despite the fact thatmost banks listed on the Nigerian Stock Exchange (NSE) have not released theirfinancial year-end (FYE) 2019 results, interim numbers show that the banks arein a race for costs efficiency as the domestic economy tightens and operatingmargins get chiselled down.

Information as regards2019-year end cost-to-income ratio was available for only five (5) banks amongstthe thirteen (13) banks listed on the NSE. Seven (7) banks had indicative cost-to-incomeratio for Q3 2019 results while Wema Bank had ratios for Q2 2019 (seetable 1 below).

Table 1: Banks cost-to-incomeratio 2017-2019

SN	Banks	FY 2019	FY 2018	FY 2017
1	GUARANTY	36.11	37.09	38.89
2	ETI	66.4*	61.5	61.8
3	ZENITHBANK	48.8	49.3	52.8
4	STANBIC	50.4	52.9	49.8
5	ACCESS	61.9	62.2	61.9
6	FBNH	71.5*	44.4	39.7
7	FCMB	78.8*	44.6	40.9
8	UBA	60.8*	64	57.8
9	UBN	74.1	79.2	61.5
10	FIDELITYBK	71.7*	71.1	68.6
11	STERLNBANK	82.3*	43.9	71.5
12	UNITYBNK	86*	54.2	27.2
13	WEMABANK	86.03**	87.16	89.9

Source: Banks investors reports, Proshare Research

Data withAsterisk *Are as at Q3 2019

Data with Asterisk**Are as at Q2 2019

The HardDash For Cheap Cash

GT Bank and UBN were thetwo banks that reported the lowest cost-to-income ratio so far for the yearended December 2019, they recorded cost-to-income ratios of 36.11% and 42.6%respectively. While Unity Bank, Sterling Bank and FCMB were the three bankswith the highest cost-to-income ratio for Q3 2019 as they reported cost-to-incomeratios of 86%, 82.3% and 78.8% respectively (see Table 1 below).

All seven-banks thatreported cost-to-income ratio in Q3 had cost-to-income ratios above 60%. Thisindicates clearly that the majority of banks listed on the NSE recorded highexpense costs relative to incomes in the Q3 2019 (see Chart 1 below).

Chart1: Banks cost-to-incomeratio 2017-Q3 2019

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Source: Banksinvestors reports, Proshare Research

Over the past three yearsGT Bank, Zenith Bank, and UBN have consistently reported low CIR relative toother banks, with GT Bank consistently recording the lowest CIR among the threebig money centre institutions. GT Bank recorded a decline in its CIR to 36.11%in 2019 from 37.09% in 2018 which was as a result of repricing of timedeposits, sustained low cost deposit mix, continuous customer acquisition driveand a retail strategy anchored on focused digital solutions to support a lowcost deposit drive.

Zenith Bank recorded adecline in its CIR to 48.8% in 2019 from 49.3% in 2018, part of the strategy itadopted was effective deposit mobilization at the retail end of the market tolend to corporate clients, leveraging the bank's strong digital platform and emergingtechnologies (see Chart 2 below).

Chart2: GT Bank and Zenith BankCost-to-income ratio 2017-2019

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Source: Banks investors reports, Proshare Research

Pulling OutThe Stops

With the loomingCoronavirus pandemic banks will see business volumes collapse as manufacturersand traders alike find their businesses orphaned by low or non-existent demand.The reverberations in the banking halls of the declining economic fortunes inQ2 2020 may become the herald of a new business era. Banks with strategic intentmay require a comprehensive cost containment and business growth and recoveryplan. They may need to pull out all thestops now.