The outlook for the Nigerian banking sector is positive mid-way through 2017, as rising oil receipts and greater liquidity in the economy, following the introduction of a new, tradeable, exchange rate in April, will see the economy and the banking sector improve, according to Business Monitor International (BMI) a Fitch Group Company in a report on the sector released last week.
“The systemically important top five banks, which together account for over half of total banking sector assets are financially sound and will remain so through the course of 2018. There are greater concerns over smaller banks, where capital adequacy ratios (CARs) are being tested, especially when rising non-performing loans (NPLs) are taken into account. Nevertheless, with rising oil prices and production, and diminishing liquidity constraints, we are confident the Nigerian banking sector will remain stable,” BMI said.
The five largest banks in Nigeria (except First Bank) saw sizeable gains in their profits in 2016 as they took advantage of a devaluation of the official naira exchange rate in June, in order to implement profitable revaluations.
In 2017, while there will not be a further devaluation to the official naira exchange rate to juice profits, BMI still expects that the new exchange rate policy being implemented by the Central Bank of Nigeria (CBN) will see a general uptick in the Nigerian economy, which will drive positive profit growth for most banks.
“The greater liquidity in the economy will see increased activity in the banking sector. There is already an improvement in the number of letters of credit, bills being settled and remittances being allowed. With the new tradeable window now active, this trend will increase,” BMI said.
The Nigerian banking index has been performing strongly this year with the banks, which make up some 28 percent of market weighting, rising 64.4 percent year-to-date on August 11, compared to a 42 percent gain for the broader all share index.
While there are still risks in the Nigerian banking sector, following the tumultuous two years the economy has undergone, from non-performing loans (NPLs) which climbed to 14 percent in December 2016, according to the CBN, BMI does not expect that they will rise significantly higher, given the improvement in the economy this year.
The picture is mixed between different banks, with some of the smaller and mid-tier banks having higher levels of NPLs than the top five where NPLs are as low as 3 percent.
These NPLs threaten capital adequacy ratios (CARs) in the smaller banks, and a stress test by the CBN in April found that seven deposit money banks had CARs lower than the required threshold of 10 percent to 15 percent, depending on size.
“We are confident that the banking sector will remain resilient in 2017, and that a repeat of the 2009 crisis is off the cards. The CBN put in a series of measures regarding capital ratios, following the banking crisis, which makes the sector far more stable than it was previously. However, another shock to the oil sector in the form of further pipeline attacks or structurally lower prices would notably increase these risks,” BMI said.
The Nigerian banking sector is well regulated, following a series of new legislation introduced in the wake of the 2009 crisis.
Increasing penetration within the unbanked and the rise of mobile banking also offer some tailwinds to growth.
Most banks have FX hedge positions, which will protect them from the negative effects of the rapid naira depreciation in 2016.
Nigeria’s economy is forecast to expand by 0.8 percent this year.