Agusto & Co. .Limited, a pan-African credit rating agency has said that the non-performing loan ratio of the banking industry is expected to remain below 5% at FYE 2023 as many banks leverage their past experiences from recessions and the pandemic to navigate this stressed cycle
The agency stated this in a report in its 2023 Nigerian Banking Industry Report tagged ‘A Resilient Industry Navigating a Volatile Operating Terrain’ seen by Nairametrics.
The report noted that the Nigerian banking industry has continued to be resilient despite the raging macroeconomic and regulatory headwinds that have constrained performance in the last three years.
- “Innovation and malleability of the banks, as reflected in the transition to the financial holding company structure and upscale of banking license by some players, have upheld the industry. Collaborations with financial technology companies (FinTechs), domestic and international development finance institutions (DFIs), among other partnerships have also supported the Nigerian banking industry,” the report said.
Industry’s loan book: Agusto & Co. noted that the industry’s loan book rose by 27% in FY 2022, spurred by increased activities at the differentiated cash reserve requirement (D-CRR) window, higher deposit base, and naira devaluation.
It added that banks have backed this growth with additional investment in credit risk management and capital raising exercises.
Macroeconomic imbalances:
According to the report, following the inauguration of President Tinubu, 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 harmonization, 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.
- 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.
- 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,” the report said.
It noted that the agency’s expectation for performance by the Nigerian banking industry is positive.
The report stated that with the reversal to normalcy concerning CRR debits and foreign currency illiquidity, many banks have witnessed a rise in available funding for risk asset creation and it believes this would be exploited to boost interest income and ancillary earnings through the treasury function.
- “Given the Industry’s net foreign currency asset position, Agusto & Co. believe the banking industry is also poised to benefit significantly from the massive naira depreciation that followed the move to harmonize 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%,” said.
The report noted, however, that the industry is not entirely insulated from the vagaries of the Nigerian economy and it expects inflationary pressures to bloat operating expenses in the near term.
- “The persistent naira devaluation and heightened credit risk environment have adversely impacted the industry’s capitalization position. Agusto & Co. expect these pressures to be accentuated by the ongoing macroeconomic reforms, particularly the naira devaluation.
- However, the ongoing recapitalization exercise by some banks as well as the planned retention of profits 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% as of FYE 2023,” it noted.
More banks to go HoldCo:
The report stated that 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. Similarly, environmental and social considerations are also expected to be more prominent in the near term.
- Overall, Agusto & Co.’s financial projection for the Nigerian banking industry is generally positive, however, we recognize that the industry will face emerging risks from policy reforms, and the ability to respond swiftly will determine the winners and the losers,” the report said.
