The banking industry’s loan book rose by 27% in the 2022 financial year, spurred by increased activities at the differentiated cash reserve requirement (D-CRR) window, higher deposit base and naira devaluation.
Agusto & Co, in its ‘2023 Nigerian Banking Industry – A Resilient Industry Navigating a Volatile Operating Terrain’ report, made available to NATIONAL ECONOMY yesterday, notes that, banks have backed this growth with additional investment in credit risk management and capital raising exercises.
Following the inauguration of President Tinubu, it says, the new administration has implemented several reforms aimed at reversing prevailing macroeconomic imbalances. Agusto & Co. believes that the reforms including the removal of the petrol subsidy, exchange rate harmonisation, tax reforms and restoration of a methodological framework for calculating the cash reserve requirements (CRR) provide growth opportunities for the industry.
For instance, we believe many banks will take advantage of rising liquidity following the eradication of arbitrary CRR debits to grow the loan book, especially, since the working capital needs of businesses continue to rise given the weakening domestic currency and other inflationary pressures, it says.
Agusto & Co expects that new loan disbursements will largely flow to traditional sectors including manufacturing, oil and gas and general commerce amongst others and resilient players given the volatile operating terrain, adding that, nascent sectors such as renewable energy, health and gender-based businesses will also continue to gain.
According to Agusto & Co, “Nevertheless, some pressures in asset quality are expected, considering the lower consumer purchasing power and dwindling margins of some industries. However, the non-performing loan ratio of the Industry is expected to remain below 5% as at FYE 2023 as many banks leverage their past experiences from recessions and the pandemic to navigate this stressed cycle.”
Agusto & Co.’s expectation for performance by the Nigerian banking industry is positive. “With the reversal to normalcy with respect to CRR debits and foreign currency illiquidity, many banks have witnessed a rise in available funding for risk asset creation and we believe this would be exploited to boost interest income and ancillary earnings through the treasury function,” it notes.
Given the industry’s net foreign currency asset position, Agusto & Co. believes the banking industry is also poised to benefit significantly from the massive naira depreciation that followed the move to harmonise the various exchange windows, reporting significant foreign exchange gains.
Overall, Agusto & Co. anticipates a 520 basis points increase in the return on equity to 26.8 per cent, however, the industry is not entirely insulated from the vagaries of the Nigerian economy and we expect inflationary pressures to bloat operating expenses in the near term.
The persistent naira devaluation and heightened credit risk environment, it says, have adversely impacted the Industry’s capitalisation position, while expecting these pressures to be accentuated by the ongoing macroeconomic reforms, particularly the naira devaluation.
However, the ongoing recapitalisation exercise by some banks as well as the planned retention of profits, it says, will moderate the impact.
Agusto & Co. notes the initiatives by banks with negative equity to resolve the challenge before December 2023. As a result, we expect the Industry’s capital adequacy ratio to improve to 19.2 per cent as at FYE 2023.
“As the competitive landscape is changing the holding company structure is gaining more prominence with banks seeking to diversify into new businesses such as pension and asset management while responding to the disruption by FinTech companies, we expect more banks to go the HoldCo route as the competitive landscape changes,” it pointed out.
Overall, Agusto & Co.’s financial projection for the Nigerian banking industry is generally positive, however, it recognises that the industry will face emerging risks from policy reforms and the ability to respond swiftly will determine the winners and the losers.
