Yield dynamics critical to banks’ performance in FY’22 We expect changes in yield dynamics to be a critical driver of banks’ earnings in 2022, given that net interest income accounts for c.60.0% of banks’ operating income. Our broad expectation is for yields to stay flat-to-falling in the first quarter of the year and rise gradually thereafter, with a base case shift of between +100bps and +200bps from current levels by year-end. In line with the stronger correlation between changes in interest income and asset yields (vs the less emphatic relationship between changes in interest income and interest-earning assets), we expect a 100 bps shift in asset yields to drive a 16.9% growth in interest income, all else equal. Conversely, assuming asset yields stay flat, banks’ interest income would only grow at the average interest-earning assets growth rate. Basel III: The primacy of Tier 1 capital The CBN’s latest guideline on the adoption of Basel III in the computation of regulatory capital emphasises the importance of higher quality capital in banks’ books. Precisely, banks will have to pay more attention to their Tier 1 capital, primarily Common Equity Tier 1 (CET1) and, to a lesser degree, Additional Tier 1 (AT1). Although the potential use of AT1 appears to have garnered the most attention recently, we assess that it only accounts for 6.7% of CBN’s minimum Tier 1 capital requirement for banks, with CET1 accounting for 93.3%. Furthermore, considering the full range of additional capital buffers that can only be met with CET1, the AT1 proportion effectively reduces to 4.8% of Tier 1 capital on average for the different categories of banks. Hence, while we expect that banks would use AT1 issuances to boost their overall regulatory ratio, we also believe that they would give significant consideration to strengthening their core capital base through a combination of external raises and internal retention. Opting for the latter could lead to lower dividend payouts subsequently
