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As more banks reel out their 2010 year end reports, industry watchers have observed that the sector has shown remarkable improvement and signs of quick recovery from the impact of the 2009 financial crisis. Most of their earnings are back in the green, although it has not been an entirely smooth ride.

Finance experts think investors should keep an eye out for low-hanging fruit as the 2010 bank’s balance sheet cleansing, an aftermath of the crisis, would place the banks on a clean pedestal and effectively put paid to the days of provisioning surprises, with the intervention of the Asset Management Corporation of Nigeria, AMCON.

The AMCON was set up last year to absorb bad bank loans by exchanging them for government-backed bonds. So far, N1.7 trillion (US$11.0 billion) bond has been issued since April.

It also announced that it had cleared all bad bank loans and was on course in its efforts to recapitalise lenders rescued by the US$4.0 billion bailout in 2009 by the end of the second quarter this year.

Fidelity Bank had earlier in the month released its 2010 year-end figures with a profit before tax of N8.6 billion. Reginald Ihejiahi, the MD/CEO of the bank, said he is pleased with the progress made by the bank in improving profit and operating performance of its business in the financial year.

The bank recorded a 61.45 per cent increase in gross earnings, from N34.7 billion in 2009 to N56 billion. Profit before Tax (PBT) also increased by 312 per cent from N2, 054 billion in 2009 to N8, 468 billion in 2010, while Profit after Tax (PAT) increased by 292 per cent from N1, 557 billion in 2009 to N6, 105 billion in 2010.

Deposits also increased by 13.41 per cent from N288 billion to N326 billion and declared a dividend of 14 kobo.

“Efforts to rework our funding structure to a more sustainable and efficient deposit mix is showing in strong positive growth in demand and savings deposits, and reduction in high cost deposits with a resultant improvement in Net Interest Margin (NIM). We expect this trend to provide the anchor for further improvement in our operating performance in 2011 as we seek increased market share,” Mr Ihejiahi said in a statement.

Looking into the books

Adesoji Solanke, banking analyst, Renaissance Capital, an investment bank, said “the bank’s earnings were below estimates mainly due to a margin pressure and much higher than expected provisioning charges in the fourth quarter.”

“2010 was still a clean-up year for Fidelity, but we note that given its relatively high Non Performing Loan (NPL) ratio, provision write-back potential is high for this post-AMCON, in our view. We like the cost focus and revival in loan growth, as well as its strong 53.2 per cent liquidity and 44.0 per cent capital adequacy ratios, which place it in good stead to witness above average NIM expansion and loan growth in 2011,” Mr Solanke said.

Afrinvest, a finance analysis firm, said the result looks decent relative to its prior year figures.

“Notably, we find that the bank’s performance in the fourth quarter was really poor, particularly from an earnings perspective. We are inclined to believe that the bank’s rather disappointing net earnings figure derives from its cost of risk, perhaps taking a much larger impairment for bad loans as against a potential write-back from loan recoveries.

“We also did not expect a significant increase in operating costs, given the cost containment measures employed by management following the onset of the banking reforms,” Afrinvest said.

On the other hand, Skye Bank’s gross earnings fell 36.1 per cent to N84.0 billion in its 2010 year-end figures, from the N131.5 billion reported for in 2009. The bank returned to profitability with pre and post-tax profits of N12.7 billion and N10.4 billion, having barely managed to break even in the preceding year.

Commenting on the results, Afrinvest said these are “decent results considering the fact that the prior year numbers was for a 15-month period. The bank’s gross earnings that were 2.5 per cent shy of our N86.1 billion target, while PBT and PAT fell 7.7 per cent and 6.8 per cent short of our N13.7 billion and N11.2 billion estimates respectively.”.

“While we have yet to speak with management regarding the finer details behind these figures, we however find this to be very much in line with our expectations. We had expected a progressive expansion in NIMs, given the reduction and subsequently low funding costs prevalent for most of 2010, to compensate for the expected drop in interest earnings,” the finacial firm added.

The firm says it would attribute the recovery in the bank’s net earnings to a much lower cost of risk, having taken substantial write-downs in 2009 as well as some potential write-backs from loan recoveries.

First Bank posted Gross Earnings of N230.6 billion, 18.9 per cent higher than the N194.0 billion posted for the period ended December 2009. The bank reported pre and post-tax profits of N43.2 billion and N33.4 billion, 16.4 per cent and 12.7 per cent lower than industry watchers expectation.

Efficiency challenges

Afrinvest expressed concerns over the possibility of First Bank experiencing efficiency challenges in 2010.

“Despite the improvement in bottom line numbers, the bank’s overall performance fell below our expectations. We reckon the bank has taken the much debated general provisioning of 1.0 per cent of performing loans (estimated at about N10.0 billion) as required by the Nigerian GAAP. This may have been responsible for this below-than expected performance,” the firm said.

“Overall, this performance falls short of our expectations and trails the average performance of Tier-1 banks (excluding UBA). With pre and post-tax margins of 18.7 per cent and 14.5 per cent respectively, First Bank’s profit margins are below the Tier-1 bank average of 25.4 per cent and 19.6 per cent. This suggests efficiency challenges within the bank” Afrinvest further said.

For the UBA, industry watchers said the bank’s report appears daunted with a higher cost profile on the back of its increased regional presence, which has impacted its profitability negatively.

The bank posted earnings of N185.2 billion, a 5.2 per cent decline from the N195.3 billion (annual figure) reported in 2009.

Finance experts also added that increased provisioning charge (exceptional item charge of 12.7 billion) greatly impaired the profitability of the bank.

“This performance clearly highlights the bank’s inability to leverage its size and presence in about 19 countries to translate scale to profits, in spite of the relative improvement in Nigerian banks’ operating environment, especially in the 4th quarter of 2010. This performance has further reinforced our view that the bank underperforms tier 1 peers without demonstrating capacity for improved operating efficiency,” Afrinvest said.

The bank’s profit before tax and exceptional items stood at N16, 541 billion in 2010, up from N13, 662 it reported in 2009 by 21 per cent. Profit after tax stood at N1, 254 billion in 2010 from N2, 375 billion in 2009.

The bank’s gross loans and advances were down by 1.3 per cent from the N636.8 billion reported for 2009 to N628.8 billion. Deposits grew at 1.8 per cent to N1.267 trillion. Net Assets were down 4.0 per cent from N186.8 to N179.4 billion while asset quality (NPL) also deteriorated during the period under review.

“Non performing loans worsened from 7.9 per cent in 2009 to 8.8 per cent, the highest within the tier 1 banking universe. This negatively impacted the bank’s profitability as provisioning charges were higher than expected. Overall, our short to medium term outlook on UBA remains downbeat,” Afrinvest said.

Emmanuel Nnorom, the bank’s executive director, finance, said, “But for the N12.7 billion exceptional items taken during the period, net profits would have been stronger. Of the N12.7 billion, N5.7 billion resulted from the loans sold to AMCON, while N7 billion represents special assets being written off since the last three financial periods arising from legacy Continental Trust Bank (CTB),” Mr Nmorom said.

RenCap says the figures show another massive clean-up year for UBA in 2010.

“As 2011 is expected to be another clean-up year, although to a lesser degree, full earnings and RoE recovery at UBA will be shifted into 2012, in our view. Nevertheless, the expected NIM uplift accompanied by generally not-excessive cost growth and 15 per cent loan growth should strengthen the bank’s operating profit in the coming year, we think,” he said.

The release of banks’ 2010 results season kicked off in late March. Zenith, GTB, and Access were the first three to release theirs to the public. Diamond, Stanbic IBTC, FCMB, and Eco Bank also followed suit.

The consensus is that in terms of asset quality, non performing loans did not do justice to the profits of some banks. The banks were meant to submit their reports to the Central Bank before 31st March and publication should be before 30th April. Analysts hope with this healthy report banks may have leapt out of the debts of the past.