By CardinalStone Research

(On Sunday), the Central Bank of Nigeria (CBN) announced new guidelines for charges by banks and other financial institutions effective January 1st, 2020. Notable highlights of the changes are:

• Current account maintenance charges: Applicable only to customer-induced current account debit transactions, subject to a maximum of N1 per mille
• Electronic funds transfer:
• N10 for interbank transfers less than N5,000 (vs. flat N50.00 previously)
• N25 for interbank transfers between N5,001 and N50,000 (vs. flat N50.00 previously)
• N50 for interbank transfers above N50,000 (vs. flat N50.00 previously)
• Card maintenance fees:
• No charge for cards linked to current account
• Maximum of N50 per quarter for cards linked to savings account (compared to the current monthly charge of N50)
• Card issuance/replacement/renewal fees:
• N1,000 charge irrespective of card type—regular or premium— (compared to different rates for different card types previously)
• ATM charges (remote-on-us and not-on-us):
• Maximum of N35 after the third withdrawal within the same month (compared to N65 previously)

Our initial assessment:

On a broad basis, the new guideline is likely to be negative for Nigerian banks given its potential drag on fee-based earnings. Prior to the new guideline, we had expected banks to boost fee-based earnings in order to offset the potential compression in interest income that could be stoked by lower yields. This view was aided by recent investments in e-business channels and a greater focus on retail strategies across our coverage banks. Notably, as at 9M’19, fee and commission income accounted for 57.0% of total non-interest income (on average) across our coverage. An adjustment for potential non-recurring gains increases the contribution of fee-based income to about 74.0% on average, highlighting its criticality to non-interest income (NII) growth.

We believe banks with a high ratio of fee-based income to adjusted non-interest income—such as Fidelity Bank (98.3%), Access (86.9%) AND FBN Holding (78.2%)—are more susceptible to the impact of the new measure. However, we note that e-business related fees could be supported by the extensive expansion of retail footprint which could, in turn, boost the volume of transactions and offset the set-back from lower charges. Elsewhere, ZENITH BANK (52.5% fee income to adjusted NII) and UBA (63.9% fee income to adjusted NII) are likely to receive additional support from stronger trading income (ZENITH BANK) and wider African penetration (UBA), to cushion the impact of revised fees on overall NII. The diversification advantage of ETI is also likely to offset the effect of regulatory-induced changes in the coming quarters.

Overall, we expect equity investors to price this in coming trading sessions. We hold the view that the recent high churn rate of regulatory measures by the CBN has heightened uncertainty in the Nigerian banking sector.