Please find below the major highlights of our Banking Industry Report 2016 titled Changing Strategies.
The crash in crude oil prices and oil production, and the attendant slowdown in economic activities in Nigeria affected the performance of the banking industry in the last two years.
A number of loan customers, both individuals and corporates are finding it difficult to meet their loan obligations leading to rising loan loss provisioning for the banks. This is also hampering the banks’ ability to create new loans. Nigerian banks are changing strategies in order to deal with the current economic challenges in order to satisfy all stakeholders.
Despite the recent challenges, there are huge banking opportunities in the Nigerian economy. Nigerian banks need to develop more constructive strategies to increase their share of the non-oil sector in their loan portfolios.
The Federal Government needs to come up with workable plans to concession some critical infrastructure (road, rail, power transmission and ports) in the country to private sector operators (both foreign and local). Also the revitalisation of the mortgage market through the Nigeria Mortgage Refinance Company (NMRC) with supports from multilateral organisations through foreign investments will help to create economic activities in the real estate sector. All these will engender bankable projects in construction and manufacturing sectors and stimulate lending.
The ratio of the broad money supply (M2) to the Gross Domestic Product (GDP) remained relatively stable between 2010 and June 2016. It is however the lowest among the comparable countries. This means that there is still room to grow the monetary aggregates in Nigeria.
In the short-term, we expect the Nigerian banks to maintain a conservative loan growth because of the current weak economic developments in the country. They need to continue with their deposit mobilization in order to gain market share. Most of the deposits will be channelled to fixed income securities such as government securities and top rated corporate commercial papers and other debt instruments.
Although this strategy may be a winning strategy for the banks in the short-term because of the attractive yields on these instruments, it is not sustainable in the long-term. This is because we expect interest rates and yields to drop in the medium-term, making these instruments less attractive than they are at the moment.
The foreign exchange rate devaluation has some negative impacts on the Capital Adequacy Ratio (CAR) of the Nigerian banks. The devaluation has increased the Dollar denominated loans of the bankswithout a proportionate increase in their regulatory capital. This will lower CAR of the banks depending on their exposures to Dollar denominated loans. Banks can deal with weak and low CAR in two ways:
1. Increase Tier 2 Regulatory Capital; 2. Increase Earnings Retention Ratio.
Although the Nigerian banking system faces some challenges in the short-term mainly from contraction in interest margin, rising non-performing loans and weak CAR, the challenges are manageable.
Our analysis of the Nigerian banks listed on the floors of The Nigerian Stock Exchange (NSE) shows that they are trading at huge discount relative to their emerging market counterparts.