Nigerian Banking in the Next Decade

During the week, Afrinvest Research launched its 2015 Nigerian Banking Sector Report, titled "Looking ahead...Nigerian Banking in the Next Decade." After reviewing the changing dynamics in the global and domestic economy, the firm highlighted its key findings below:

The industry has witnessed phenomenal evolution in the last decade, with some of the key highlights being; the consolidation of banking industry in Nigeria in 2005/06; SLS's era which was anchored on 4 pillars of enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution, and ensuring the financial sector contributes to the real economy; and the current era of Governor Godwin Emefiele which proposed to focus on macroeconomic stability and development finance.

Against the back drop of global economic fragility, oil prices touching new lows, exchange rate volatility and unconventional monetary policy in developed market as against hawkish stance in emerging markets including Nigeria, the Nigerian Banking Industry recorded a gross earnings of ₦3.3 trillion in FY: 2014, representing a 17.7% expansion relative to ₦2.8 trillion in FY:2013. Industry Cost to income ratio moderated significantly from 82.0% in 2013 to 66.0% in 2014 despite CBN's hawkish stance on CRR and MPR during the year. Consequently, PBT expanded to ₦682.3 billion (+31.6%) from ₦501.3 billion in FY: 2013.

It further observed that the industry's Net Margin settled at 20.0%, which was 2.0% below 22.0% average for countries in the BRICS category. Meanwhile, Tier-1 Banks continue to dominate the industry across performance metrics as players in the classification accounted for 66.0% of Gross Earnings (from 65.0% in 2013), 75.0% of PBT (from 88% in 2013), 70.0% of Total Assets (from 68.0% in 2013), 70.0% of Total Loans (from 69.0% in 2013) and 70.0% of Total Deposits in 2014.

Weakened Assets Quality of Banks
Interest in the lending structure of Nigerian banks has been magnified by the plunge in global oil prices. Afrinvest analysis revealed that the loan books of banks across both Tiers are mainly concentrated in the Oil & Gas sector (26.0%). Tier-2 banks are more exposed to the oil & gas sector, with players in the space allocating 27.4% of their gross loans to the sector in 2014 relative to Tier-1 banks' 26.5%. It imagined that the preference is based on high revenue/profitability upside, stronger cash flow and developed supportive infrastructures that have lowered risk perception. However, the current challenges of lower crude oil prices have significantly weakened the assets quality of banks, with Oil and Gas related NPLs contributing an average of 12.7% to NPL ratio across banks.

Allocation of credit to the oil & gas sector appears disproportionate to the sector's contribution to the GDP (11.2%) suggesting a crowding out of other productive sectors of the economy. For instance, the Agriculture sector which contributed more than 20.0% to GDP is observed to receive only 4.4% of total credit allocation in 2014. Upon further analysis, it was observed that the structure of lending broadly differed across selected BRICS and MINT countries, mirroring dynamics of the stages of growth and development, economic structure, financial sector framework and banking regulations in the respective countries.

Its prognosis is that lending structure in the next decade should reflect the changing economic structure in Nigeria, thus it expect banks to take advantage of the faster growth and expanding opportunities in the non-oil sectors of the economy.  The firm believe that banks will need to moderate credit to the Mining/Natural Resources sector while directing to the utilities, manufacturing and services (including household, real estate, education, health, transport and communication) sectors in line with the overall macroeconomic outlook of the country and in furtherance of the recent drive to boost non-oil revenue by the new administration.

Nigerian banking industry has mainly served the mining sector over the past one decade; banking in the next decade should focus on re-allocating risk assets by tapping into lending opportunities in the non-oil oil sector. However, banks are not expected to reduce funding of the Oil & Gas sector, rather, it is expected that banks will deepen funding structure to grow their presence in non-oil sectors.