Banking/finance sector to see mixed outlook in 2018
The banking and finance sector will thrive in 2018 on the back of a more stable macroeconomic environment due to rising crude oil prices, foreign exchange reserves and a stable currency but face significant risks from the incursion of financial technology (Fintech) into the financial space.
Emerging issues such as Fintech, virtual currencies and mobile banking will have a considerable impact on the sector this year.
“I expect some impact from fintech, virtual currencies and mobile banking as technology and telecommunications companies seek new revenue streams from traditional banking base,” Taiwo Oyedele, head of tax and regulatory services, PWC, said in an emailed response to BusinessDay.
Unlike in 2017 when the banking and finance faced early headwinds, 2018 is starting on a stronger footing for the sector. The country’s external reserves have touched a new high of US$37.92 billion as at December 22, data from the CBN shows, up 50 percent since December 2017.
GDP which had declined by -1.73 percent and -0.91 percent in the fourth quarter of 2016 and first quarter of 2017, has returned to a positive growth of 1.4 percent in the third quarter of 2017.
Inflation rate, which peaked at 18.72 percent in January 2017, has dropped to 15.9 percent in November 2017. The exchange rate of the naira which hit as high as N500 to the US$ in early in 2017 is now stable at around N360 to the US$. Dollar liquidity challenges now look like a distant memory.
The CBN intervention in the FX market played a vital role in stabilising economy, with manufacturers and investors able to access dollars through Investors, Exporter and SME Windows in April of 2017.
But here is 2018 and analysts see the banking and finance sector thriving if these macroeconomic gains are sustained.
Bolade Agbola, financial analyst/CEO of LAM Agro Consult Limited believes 2018 will be very interesting for banks as the economy is expected to consolidate its emergence from recession with a projected growth of about 2 percent per annum.
Crude oil price is expected to hover around $60 -65 per barrel generating necessary income for return of the economy to growth trajectory, provided that production at OPEC quota of 1.8 million per day is not hampered by militant restiveness. The challenge the banking sector may face is reduced margin on its fixed income investments, which had become a major component of its balance sheet due to the expected cut in interest rates.
Inflation is expected to slow down leading to a reduction in the CBN benchmark rate (MPC) currently 14 percent per annum .The rate may go down to 10 percent depending how significant the drop in inflationary rate, Agbola forecasts, although other analyst believe a 1.0 percent cut is more likely in the first quarter of 2018.
On the downside, lagged impact of the five quarters of recession will manifest fully in the performance of banks in 2018 which will show in the escalation of non- performing loans (NPLs). The banks in the lower rung of the ladder may need to raise fresh capital to meet regulatory requirements or merge as their liquidity is impaired by escalating NPLs, he said.
“The banks are expected to put up good performance at the end of the year given their critical role in the economy despite the possible shaking off of the weak ones as another round of mild consolidation may be imminent”, Agbola said in an emailed response.
Uche Uwaleke, associate professor and head of Banking and Finance department Nasarawa State University, outlined other key issues that would drive the banking and finance industry to include but not limited to International crude oil price, timely implementation of the 2018 budget, monetary policy, federal Government’s strategy of reducing domestic borrowing and efforts of the Presidential Enabling Business Environment Council.
Banks that fed fat in the last three years from a high interest rate environment, would now have to be innovative in 2018 in deploying their resources in a low interest rate environment and also fend off increasing competition from fintech firms encroaching into their space.
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