Rating Agency, Moody’s had projected a stable outlook for Nigerian Banks. This was contained in a report titled “Banking System Outlook – Nigeria”. The report had a mixed bag of good and bad news for the banking sector.
Let’s get to the bad news first;
Banks future profits won’t be as great as they have been in the last two years.
“Despite the stabilization in banks’ foreign currency funding and liquidity profiles, Moody’s expects bank earnings to come under pressure.
Nigerian banks’ profitability will nevertheless decline on account of lower yields on government securities, as well as a likely reduction in income from derivatives. However, these pressures will be partially offset by a recovery in loan growth and transaction income from the expansion of digital platforms.”
They also believe banks capital adequacy ratios (the ratio of a bank’s capital to its loans) will decline over the next one year to 18 months.
“Capital metrics will also decline marginally over the 12 to 18 month outlook period. Additionally, asset quality will remain weak, but a further deterioration in loan performance will be marginal as operating conditions slowly improve.”
Now to the good news
Nigerian economy will continue to improve which is good news for banks as it suggest fewer loans will go bad.
“Operating conditions for the Nigeria’s banks will continue to gradually improve over the next 12 to 18 months, but remain challenging,” said Akin Majekodunmi a Vice President and Senior Credit Officer, at Moody’s. “Nigeria’s growth prospects remain vulnerable to global oil prices, as crude oil will remain the nation’s largest export commodity and its main generator of foreign currency for the foreseeable future.”
“Moody’s forecasts a recovery in real GDP growth over the next two years, up from 0.8% last year, helping lending growth rise to around 10% after a 15.4% contraction in 2017.”
Yes, bank profits might not be as great as they used to but they get compensated by better quality loans.
“Meanwhile, nonperforming loans and associated provisions in the banking system will increase marginally in a delayed response to sluggish economic growth experienced last year, and Moody’s expects them to range between 15.5% and 18% of gross loans over the outlook period.”
Banking stocks are still a good bet for retail investors, however, it is important to track the earning per share of these banks in relation to their share price. Upsides will exit when banks are further away from their peers when it comes to price-earnings ratios.