A growing trend among Nigeria’s commercial banks indicates that a tightening domestic operating environment may be opening up new vistas of opportunity for expansion into the broader African region. Already, at least six of the country’s commercial banks have assumed bellwether positions on the continent.
The American rating agency, Fitch, had said Nigerian banks will face near-term execution and credit risks from their presence in other Sub-Saharan African (SSA) markets, depending on the degree of operating environment difficulty and underlying sovereign ratings of these markets. However, longer-term, increased geographic diversification may support banks’ business profiles and growth prospects, and financial performance stability.
Hampered by regulatory intervention and domestic country risks, large Nigerian banks are transitioning into regional financial services providers by leveraging their developed domestic business models and franchises, supported by enhanced governance practices and risk management capabilities.
Barriers to entry and competition from incumbents in new, mostly frontier, markets are relatively low and the exits of long-established international banks from the region provide significant growth opportunities.
Hence, amid the continuous tightening of the interest rate benchmark by the Central Bank of Nigeria (CBN), there have been predictions that more Nigerian banks will have to pursue cross-border expansion.
Regional expansion typically involves setting up banking and non-banking subsidiaries. The Central Bank of Nigeria (CBN) requires banks’ non-banking subsidiaries to be held separately under group holding companies. Non-banking subsidiaries offer diversified products including payments, insurance and pension funds which have significant upside potential.
The chief executive of Cowry Asset Management, Mr. Johnson Chukwu, said Nigeria’s continuous hawkish monetary policy would see more Nigerian local lenders find footing in other climes with favourable interest rates.
He explained that the cumulative 6.5 per cent increase in the benchmark interest rate would encourage Nigerian banks to expand into other African markets by increasing lending yields and reducing banks’ net interest margins.
“We project more Nigerian banks to adopt cross-border expansion and benefit through risk diversification and greater profit opportunities for shareholders,” he said.
He said the adoption of holding company structures by many local lenders will aid in smothering the rising fintech competition through the creation of new fintech products or by collaborations with and investments in other businesses that are developing goods.
As of the end of December 2021, UBA was the biggest offshore investor with operations in 18 countries. Access Bank was second with 11 offshore operations, followed by GTCO, with nine, FBNH with six, and Zenith Bank with three offshore operations.
Chukwu stated, “The transition to Holdco structures will give Nigerian banks more leverage to diversify their earnings in the face of the present tight monetary policy regime, thus enhancing their topline. Zenith Bank and Sterling Bank recently got approvals in principle to convert to hold companies, following FBN Holdings, Stanbic IBTC Holdings, FCMB Group, and GTCO as NGX-listed banks, which currently operate Holdco structures.
“So far, the banking sector recorded a positive year-to-date performance of 8.50 per cent. An example of diversification from Nigerian risks through non-Nigerian operations can be seen with the United Bank for Africa. Sixty-three per cent of contributions to UBA’s profit before tax came from African operations in 21 countries,” he added.
Highlighting the need for the export of Nigeria’s services, the chief economist of PricewaterhouseCooper (PwC), Dr. Andrew Nevin, stressed the need for Nigeria to export financial services, knowledge, music, software development services, business process outsourcing, fintech, and talents like football. He cited Access Bank, UBA, and other banks on the march across Africa with banking services. He said the government needs to expand on that by training and providing opportunities for its people.
Nevin’s position is an indication that, unlike other sectors of the Nigerian economy, the banking services sector may be the most prepared for competition in the emerging African Continental Free Trade Agreement (AfCFTA) market.
On the flip side, Nigerian banks with sizeable exposures outside their home market can be negatively affected by exposures to low-rated countries, such as the Republic of Congo (‘CCC+’), Mozambique (‘CCC+’), Ghana (RD), and Zambia (RD). However, the operating environment (OE) score can be supported by exposure to higher-rated OEs, such as Cote d’Ivoire, South Africa, and Namibia (all rated ‘BB-’).
Banks’ risk profile scores can be negatively affected by market risks, especially FX risk. Regional expansion brings significant operational risks and requires robust processes and systems to mitigate human error, fraud, and cyber-related risks. Business profiles can be notched up when regional diversification directly benefits the franchise, market position, and performance stability, or notched down when expansion strategies fail to deliver stated objectives.
Nigerian banks typically lend to the government or invest in government securities in countries where they have a footprint, making subsidiaries’ creditworthiness closely linked with domestic sovereigns. The credit profiles of the latter are very weak in a number of African countries.
Lecturer at the Insurance Department of Ebonyi State University, who specialises in risk management, Dr. Nelson Nkwo, said regional expansion for Nigerian banks may benefit profitability and internal capital generation, with increased risk-weighted assets usually tempered by zero-risk weighting for government exposures. Conversely, he said uncontrolled growth may exert near-term pressure on capital. Regional subsidiaries that gather low-cost, local-currency, and US-dollar-denominated deposits can help diversify the parent group’s funding base and lower overall funding costs. “Subsidiaries can also support the groups’ liquidity when USD funding is fungible,” he said.
Contrary to the claim of fighting inflation, Nigeria’s high-interest rates regime may be linked to competition with increasing rates in developed countries where central banks are increasing the rates to fight domestic inflation, spurred on by supply-chain disruptions caused by COVID-19 and subsequently, Russia/Ukraine War.
With such a trend, interest rates in Nigeria may continue northward for the unforeseeable future, which may ramp up investments further afield.
