Guaranty Trust Bank has cut its loans and advances to customers for two years before the Central Bank of Nigeria’s [CBN] increased increased loan deposit ratio forced its management to make a U-turn in 2019. Yet, the bank wasn’t rebuilding the loan portfolio strong enough to regain lost ground as per its latest interim report in September 2019. The bank’s full year position at the end of 2019 is still quite likely to show a net customer lending volume well below the closing figure it rendered four years ago.

CBN enforced increased loan deposit ratio of banks twice in the second half of last year compelling banks to lend to customers or be sanctioned. The new policy is intended to raise credit to the real sector of the economy with priority to small-scale enterprises, retail businesses, real estate and consumers.

The policy is a response to weakening financial intermediation, as banks continued cutting down lending to the private sector while piling up government investment securities in their balance sheets. GTB slashed customer lending portfolio by 9 percent in 2017, accelerating to 13 percent in 2018. Its customer credit volume of N1,259 billion at the end of 2018 stood 21 percent down from the peak figure of N1,589 billion registered at the end of 2016. It was the lowest customer credit figure for the bank in five years.

The CBN identified the downward trend in lending to the private sector as the first of three main downside risks to Nigeria’s economic outlook. Its persuasions to banks to increase lending to the private sector failed to draw some banks out of their shells of caution. The new policy is seen to be succeeding somewhat so far in driving apparently unwilling banks back to the lending field.

GTB showed a change of behaviour at the end of its third quarter operations in 2019 from cutting customer loans and advances to building the assets once again. It closed the period with a net customer lending position of N1,378 billion, meaning an additional credit of N119 billion over the closing figure in 2018. That represents an increase of 9 percent and an indication of a positive impact of the new policy on lending on the Nigerian economy.

Despite the progress, the growth rate isn’t strong enough to rebuild the loan portfolio after two years of slimming down. The bank is expected to close the 2019 financial year with customer loans and advances still significantly down from the 2016 high.

While the bank’s management was cutting down loans and advances, it was growing investment securities at over 26 percent in 2017 and a further improvement of 3.4 percent to N635 billion in 2018. The bank’s investment portfolio swelled further by 4 percent to N662 billion at the end of September 2019.

The CBN’s policy is succeeding in curbing banks’ appetite for risk free, fixed income investments – that have been increasingly occupying an enlarged share of bank balance sheets. It serves as a counter cyclical move to prevent banks from reinforcing the downward trend in economic activities. The strength for stepping up economic growth lies in an easy availability of credit and capital to producers and consumers.

The new policy comes with a threat of sanctions for non-compliance. A levy of additional 50 percent of cash reserve requirement is stipulated for any lending shortfall. It has therefore ensured that growing loans and advances to customers will henceforth be the major route to expanding the asset side of the balance sheet. Small-scale businesses are expected to gain increased access to bank loans under the new lending rule.

The increase in loans and advances however failed to lead to an increase in interest earnings for GTB. Instead interest income dropped by close to 6 percent to N224 billion at the end of the third quarter. This indicates either a decline in the average yield of the naira of loan or rising asset impairment or both.

The bank closed the third quarter operations in 2019 with gross earnings of N326 billion – a decline of 3.3 percent year-on-year. A slightly stronger growth in earnings is expected to be recorded in the final quarter – which could improve the full year revenue position from decline to flat growth for GTB in 2019. The bank ended the 2018 trading with gross earnings of N435 billion.

The bank achieved a reasonable growth of 10 percent in customer deposits in 2018, which improved further by 5 percent to close at N2,390 billion at the end of September 2019. The growth in deposits is however followed by a sharp drop of 23 per cent in interest expenses at the end of the third quarter, meaning a big slash in the average interest rate on the naira of deposits. The cost saving face for the bank also has the other face of loss of income to depositors.

GTB closed the third quarter operations in 2019 with an after tax profit of over N147 billion, a moderate improvement of 3.4 percent year-on-year. By squeezing costs, the bank maintained one of the highest profit margins in the banking industry at 42.3 percent in 2018 – a sustained improvement from 31.7 percent in 2016. It squeezed costs further in 2019 to raise net profit margin to a new peak at 45 percent at the end of the third quarter- the highest net profit margin in Nigerian banking space and beyond.