By Adedapo Adesanya
Pan-African credit rating agency, Agusto & Co. Limited, has said 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.
In its 2023 Nigerian Banking Industry Report seen by Business Post, the agency said the reforms being instituted by the administration of President Bola Tinubu would provide growth for the industry.
The 2023 edition of the annual report provides a comprehensive review of Nigeria’s banking industry and the near-term expectations and outlook for the Industry.
The firm said the new administration has implemented several reforms aimed at reversing prevailing macroeconomic imbalances and believes that the reforms, including the removal of the petrol subsidy, exchange rate harmonisation, tax reforms, and restoration of a methodological framework for calculating the cash reserve requirements (CRR) provide growth opportunities for the industry.
It said, “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 projected that the banking industry would benefit significantly from the Naira depreciation that followed the move to harmonise the various exchange windows, reporting significant foreign exchange gains.
“Agusto & Co. anticipates a 520 basis points increase in the return on equity to 26.8 per cent. However, the industry is not entirely insulated from the vagaries of the Nigerian economy, and we expect inflationary pressures to bloat operating expenses in the near term,” the agency stated.
Agusto noted that the bank’s loan book rose by 27 per cent in FY 2022, spurred by increased activities at the differentiated cash reserve requirement (D-CRR) window, higher deposit base, and Naira devaluation.
“Banks have backed this growth with additional investment in credit risk management and capital raising exercises,” it noted.
Agusto said it also 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, the report said.
It noted that innovation carried out by banks, as reflected in the transition to the financial holding company structure and upscale of banking licenses by some players, have upheld the industry.
It called for more collaboration between traditional banks with financial technology companies (Fintechs) and domestic and international development finance institutions (DFIs), among other partnerships that have also supported the Nigerian banking industry.
However, some pressures in asset quality are expected, considering the lower consumer purchasing power and dwindling margins of some industries.
Despite this, Agusto & Co. expects the non-performing loan ratio to remain below 5 per cent by the end of 2023 as many banks leverage their past experiences from recessions and the pandemic to navigate this stressed cycle.
Agusto’s financial projection for the Nigerian banking industry is generally positive. However, it cautioned that “we recognise that the industry will face emerging risks from policy reforms, and the ability to respond swiftly will determine the winners and the losers.”
