Factors that will determine Nigeria’s banking sector survival in 2019

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Developments in Nigeria’s banking industry in 2019 will be shaped by seven global and domestic factors which will work simultaneously to impact on banks’ profitability, earnings and non performing loans.

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They will come with likelihood of staff retrenchment and increased confrontation between shareholders and management of banks. The seven factors and how they will likely impact the industry are presented below. CBN Governor, Mr. Godwin Emefiele Crude Oil Price

According to the Central Bank of Nigeria (CBN), the oil and gas industry accounts for 30 percent of total loans and 47 percent of nonperforming loans (NPLs) in the banking industry. When crude oil price is high or stable, oil companies do well and by extension banks make more money especially interest income from oil and gas industry.

But when the price of crude oil falls, as it happened in 2014 to 2015, oil companies make less money or record losses and by extension, unable to repay their loans, resulting in increased NPLs in banks, and reduction in banks’ profitability.

With the price of crude oil on the downward trend since October, 2018 from peak $86/ barrel to as low as $47.25 earlier this week before a two-day rebound to $56, the risk of banks recording more NPLs in 2019 is becoming real. According to Johnson Chukwu, Managing Director/Chief Executive, Cowry Asset Management Limited, “The greatest downside risk facing the banking industry in 2019 is the price of crude oil.

Should the price of crude oil drop to the lower $40s or drop to the lower $30s, the banking industry may see an increase in the level of nonperforming loans (NPLs).

“Low oil price could also trigger a devaluation of currency of naira, such devaluation may have an impact on level of non-performing loans, as well as make impact on ability of customers to service their debt, which also directly impact on level of NPLs in the banking industry,” he said.

The reality of this risk, according to analysts at Vetiva Capital Management Limited, will compel banks to reduce lending to oil and gas sector, which in itself can undermine their earnings and also economic growth.

“We expect banks to remain cautious in extending credit to the oil and gas sector given the recent bearish trend in oil price. We identify this as a quagmire for the economy where on one hand, strong credit extension to the private sector is a prerequisite to sustainable and inclusive economic growth while on the other hand banks continue to await a stronger recovery and a less volatile environment before investing their assets”, they said in their 2019 projections.

International Regulations The Basel Three and International Financial Reporting Standard 9 are international financial regulations, with the former taking effect last year while the later takes effect from January 1st, 2019.

Implementation of the Basel Three leads to higher Capital Adequacy ratio for banks, while that of IFRS 9 raises the criteria for recognition of NPLs resulting to likelihood of higher credit losses for banks.

The net implication of the two regulations is that banks will have to raise fresh funds to increase their capital base in order to comply with regulatory capital adequacy requirements.

Thus in 2019, the banking industry will witness capital raising exercises by banks. “There will be need for additional capital because they are complying with IFRS 9 and with Basel 3, from January.

So capital adequacy ratios are going to be higher”, said Bismarck Rewane, Managing Director/Chief Executive, Financial Derivatives Company Limited. “We should see banks trying to raise capital to improve their capital base in order to meet Basel 3 requirement.

So we should expect some form of recapitalisation either in the form of equity or Tier 2 capital i.e. bonds”, said Johnson Chukwu of Cowry Asset. Atiku and Buhari 2019 Election

The outcome of the 2019 general election especially at the presidential level will greatly impact banking business in 2019. Analysts at Vetiva Capital projected that the slow growth of banks’ lending to the economy witnessed in 2018 will persist in the first half of the year due to election uncertainties.

“We expect the conservative approach to credit growth to persist in 2019. Particularly, amid the upcoming election season we believe lenders will remain majorly on the sidelines through the first half of the year as the political scene takes center stage and also given the possibility of policy reversals in the economy should there be a change in leadership”.

Johnson Chukwu of Cowry Asset however noted that a peaceful outcome of the election will impact positively on banks business. He said: “Should election be successful and all the political parties and contestants accept the result, then we should see stable economic environment, and quicker recovery of the economy.

But should the result be contested, then it will create some level of political uncertainty, then we should see reversed of economic recovery and economic instability”. Change in economic policy Closely related to the outcome of the election is the likelihood of a change in government’s economic policy post May 29th. According to Chukwu of Cowry Asset,

“The policies of the new government will also have direct impact on the banking industry. If the current policies persist, the economy will witness slow growth, but should there be a new economic policy by whoever wins the election at the national level, then it should trigger stronger economic growth that will trickle down into customers’ demand for more banking services.”

Naija247news
Naija247newshttps://www.naija247news.com/
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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