Expectations high on banking sector performance
In the 2017 banking sector to be presented in London Stock Exchange (LSE) this Friday by Afrinvest West Africa, the firm’s outlook on the banking sector for the rest of the year and 2018 is broadly positive.
However, it note that crystallisation of asset quality risk still poses a threat to the sector, given that the economy is still recovering from a recession and banks loan book is heavily skilled to high risk sector – upstream oil & gas, manufacturing, general commerce and power sectors.
Considering the highlighted risk, Afrivest analysts took a look through their crystal ball and presented their expectations for the performance of the banking sector.
Consequently, they expect slowdown in pace of asset quality deterioration. Despite forward guidance of banks to keep credit expansion minimal in 2017, the analysts believe that the exposure of pre-existing loans to “high risk sectors” will continue to pressure asset quality in the year. However, they expect asset quality metrics to improve in 2017 against the backdrop of steps being taken to restructure loans to challenged sectors as well as some of the noticeable improvements in the General Commerce and Manufacturing sectors which have been buoyed by developments in the foreign exchange market.
The analysts expect industry gross earnings to remain buoyed by higher interest income on account of the high interest rate environment as well as improved non-interest income from trading inflows as well as fees and commission.
Although forward guidance from majority of the banks, indicates the reluctance to extend credit, “we believe that the any moves to unify the forex market will lead to a nominal expansion in loans, given the proportion of foreign currency loans”.
Afrinvest analysts expect Capital Adequacy Ratio (CAR) pressures. The depreciation in the domestic currency resulted in higher Risk Weighted Assets on the books of the banks. Hence, capital adequacy ratios of some of the banks fell towards threateningly low levels. Consequently, we expect such banks to approach the market in order to raise capital to shore up capital buffers.
The improvements in the FX market, have reignited appetite for Eurobonds issuance. As a result, a number of Tier-1 banks have raised Eurobonds in 2017; ZENITH and UBA raised US$500.0m each with both issuances oversubscribed by 3.0x and 2.4x respectively. FIDELITY and GUARANTY have Eurobonds that will be maturing in 2018 with expectation of possible refinancing through new issuances. Furthermore, FIDELITY on October 13th 2017, successfully issued $400.0m via Eurobonds at a coupon of 10.5 percent.
Speaking at a press conference to announce the launch of the 2017 edition of Afrinvest annual Nigerian Banking Sector Report at the London Stock Exchange (LSE) on October 27, 2017, Chioke said the financial performance of the sector was principally affected by monetary policy decisions tied to the management of the foreign exchange market which had a ripple effect on earnings across the industry.
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