Capital market operators and investors have expressed concern that the widening gap between tier-1 and tier -2 banks may lead to loss of depositors' confidence in tier-2 banks as full results of 14 banks listed on the Nigerian Stock Exchange, NSE, in the first nine months of this year (9M'17) point to increasing dominance of the market space by the tier-1 banks to the detriment of the tier-2 banks.
The 14 banks (out of 26 operating in the country) which are listed on the NSE control over 90 percent of the market share. Five banks (which are among this 14) make up tier-1 and they control about 70 percent of the entire market.
The five tier-1 banks are Zenith Bank, Guaranty Trust Bank (GTB), United Bank for Africa (UBA), First Bank and Access Bank.
At total gross earnings of N3.2 trillion reported in the 9M'17, the tier-1 banks controlled 59.4 percent, and they accounted for 75.8 percent of the N672.1 billion total profit before tax (PBT) of the sector during the period.
The five tier-1 banks also accounted for 79.2 per cent of the tax paid to the federal government during the period under review.
Market operators and stakeholders have forecast that the tier-1 banks will record more impressive performance at the end of the financial year 2017, if the positive macroeconomic environment is sustained.
Why the widening gap
The operators and stakeholders have attributed the widening gap between tier-1 and tier-2 banks to higher market share, where the tier-1 banks control, not just the numbers but also the leading corporate accounts and high networth individuals (HNI).
They also noted that the increase in Treasury income arising from Central Bank of Nigeria's monetary measures directed at huge transactions in government securities, which came to the advantage of the banks with largest deposits enabling them to trade in the treasury instruments at high volumes.
Moreover, the banks with bigger resources are now investing heavily into technology-driven e-banking service which is now a major income stream in the financial sector, unlike the tier-2 banks that could not match the resources and are now losing business and market share to the tier-2 banks.
The industry analysts further explained that for the gap to be reduced the tier-2 banks would have to deploy technology and product innovations tailored to meeting various depositors' needs, adding that their capital adequacy would also need enhancement.
Speaking to the issue of widening gap between tier-1 and tier-2 banks, the Group Managing Director, Afrinvest West Africa, a Lagos based investment house, Mr. Ike Chioke, said "that in 2016/2017 banks were bifurcated in their performance. On one hand, the depreciation of the currency clearly affected all of them by making their capital-adequacy ratio appear quite compressed.
"The depreciation in the domestic currency resulted in higher risk weighted assets on the books of the banks. Hence, capital adequacy ratios of some banks fell towards threateningly low levels. Consequently, we expect such banks to approach the market in order to raise capital to shore up capital buffers."
On the other hand, he said that "tier-1 banks have so far benefited from depreciation of the Naira and this has led to the continuous widening of the market share gap between tier-1 banks and tier-2 banks.
He stated: "The bigger banks, typically the tier-1 banks, that have more foreign currency deposits that are risk assets, have benefited from the depreciation and you see them booking exchange gains, thus, explaining the up-shoot in the profit numbers of the likes of GTB, Zenith bank Access bank etc.
"So we have seen this is continuous widening of the gap between the tier-1 and tier-2 banks' market share. Once upon a time when tier-1 banks accounted for about 60 percent to 65 percent of the market share of the banking sector. In the universe of the 14 banks surveyed, we saw that the percentage has risen to about 70 per cent. The tier-1 banks have continued to grow often at the expense of the tier-2 banks."
Commenting, Managing Director/CEO, APT Securities & Fund Limited, Mr. Kasimu G. Kurfi, said : "The Q3'17results show that banks recorded more growth in Income generation but less to the bottom line as in case of Access, FBHN, GTB, the few banks that have better increase in the net profit most of them provide less or non to bad loans.
"Meanwhile, the widening of the gap from 1st tier market and the other tiers is due to strong balance sheet and high Treasury bill return as you can see Zenith Bank earned almost $70billion from Treasury income same with GTB, UBA and FBNH. "They also enjoy cheap foreign loan whereby they can borrow in a single digit but 2nd tier banks cannot. The Single Treasury account by FGN much affected the tier-2 banks than tier-1. The economy recession has exposed tier-2 banks more than tier-1.
"The implication of the widening gap is making depositors have less confidence in those banks than ever before and increase the cost of taking money as the associated risk is higher."
In his own view, Managing Director/CEO, High Cap Securities Limited, Mr. David Adonri, said: "The tier-1 banks have seriously outperformed the lower tier banks because of the wide gap in profitability. They have consistently performed well. Tier-1 banks have more resources and higher market share to establish competitive edge. The smaller banks are also profitable and competitive notwithstanding the disparity in size.
"The implication is that tier-1 banks will continue to have higher patronage from customers than tier-2. Tier -2 banks need to improve in terms of product innovation and raise their capital to be able to compete effectively. The danger is that investors' confidence in tier-2 banks may be threatened. However, an efficient industry has operators of different sizes."
Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, said: "The banking sector as you can see has started to record growth as the economy keeps growing. The tier-1 banks will continue to dominate tier-2 banks as long as they continue to grow their capital.
"The tier- 2 banks need to raise their capital to be able to meet customers' needs and current realities."
Mr. Moses Igbrude, Spokes person for Independent Shareholder Association of Nigeria, ISAN, said: "The banking sector is an active sector and we shareholders look up to for consistency and constant payment of early dividends.
"Concerning the gap between tier-1 and tier-2, it is about innovation and creativity. It is all about the consumers, what they want is what the market is made up. Treat the consumers with disdain soon you will be out of the market. It is not about tier 1 or tier-2, it's about what you can offer the market. Consumer is KING. They determined who dominate the market place.
"So banks, weather in tier-1 or tier-2, must continue to hold the consumers as pinnacle of their business. They should consistently look out for consumers needs and find ways to use technology, innovation and creativity to deliver them to the market place and any company that makes this as its core business objective will always be in the hearts of the consumer and it will remain the market leader.
"The tier-2 banks should use their resources to focus on their areas of competencies and deliver good products and services to satisfy their customers always. Doing so will help them gradually gain market share. The market place is dynamic, it's ever ready to reward those who know how to satisfy it's needs."
Alhaji Gbadebo Olatokunbo, shareholder/ Activist & Co-founder, Nigeria Shareholders Solidarity Association, NSSA said : " On gap between tier-1 and tier-2 banks, the way the economy is being run favours the 1st tier, because of their advantages over others in the economy.
They've brands, logo, logistic, market-shares etc that speak, work and influence to their advantages.
"The tier-2 banks need serious encouragement and support to establish, steady and grow, in order to play their roles within the economy.
"On growth differences of 1st to 2nd tiers, because there are two sides of the coin, yes, if the necessary encouragement/support were denied to tier-2, they (tier-1) will continue to be the only deciding factors on the economy.
"But, if the needful were done on time with seriousness of purpose and determination, the tier-2 banks would be able to play their necessary roles . The widening gap implications is that the economy will not be able to grow as it should, because of the one sidedness, which is of great disadvantage to any growing-economy, because the best/fast and lasting ways for a developing-economy to grow is to start from SME, grow and develop to advance levels which tier-2 banks can do."