How will rising costs impact bank profits in H2' 2022?
Last week, I examined how key factors like the recovery from covid-19, the Russia-Ukraine war, rising inflation and interest rates, and domestic regulatory policies have impacted the banking sector’s earnings in the first half of 2022.
I explained that the higher interest rate environment, loan book growth, and increased mobile banking service adoption supported bank earnings.
Key takeaways:
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Despite an impressive topline (revenues) performance in H1’22 among top Nigerian banks, bottom line (profits) performance was mixed due to rising costs and higher taxes.
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The main drivers of rising costs were persistently high inflation, more interest expenses (due to higher interest rates) and regulatory charges. Furthermore, the expiration of the 10-yr tax exemption period on investment securities in January 2022 translated into higher bank taxes.
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Going forward, costs will continue rising due to high inflation, higher interest rates, and more taxes. Asset quality could deteriorate due to political and exchange rate risks.
These factors were enough to cushion the impact of the higher interest payments made by banks to their customers. As such, they translated into profit after tax (PAT), growing by an average of 18% y/y in H1’22. The highest increases were recorded in FBNH (49%), Stanbic (36%) and Fidelity (21%).
Despite this double-digit growth in the first half of the year, I warned that higher contractionary monetary policies (i.e. higher interest rates) and higher inflation were
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