Banking in Nigeria: Stuck in a rut
Nigeria’s banking sector needs a dose of confidence to kick-start growth in wider economy
If you are a banker in Nigeria today you would be forgiven for feeling like the bad news never ends.
Collapsing oil and gas prices, an economy in recession, Treasury Single Account (TSA) reforms that mopped up liquidity from the banks, a half hearted devaluation by the Central Bank, thin capital buffers, soaring non performing loan ratios (NPLs), falling stock prices and rock bottom valuations, will test the stuff the sternest banker is made of anywhere in the globe.
According to the central bank of Nigeria (CBN) in a recent report, the ratio of non-performing loans to total credit rose to 11.7 percent at the end of June from 5.3 percent at the end of 2015.
In Nigeria the above problems come on top of some of the harshest business environments in emerging markets, with valuations at rock bottom and most banks trading at less than 0.5 xs book value.
Nigerian banks have seen subdued growth in assets since the high flying days before the 2008/2009 banking rises when private sector credit growth grew at an average of 50 percent plus per annum between 2005 and 2008.
The financial services sector (ex insurance) contracted by -13.24 percent in Q2, 2016, (when overall GDP fell by 2.06%) and contributed just 3.67 percent of Nigeria’s nominal GDP for the period.
In South Africa Financial services grew by 2.9 percent in Q2 2016, and contributed about 15 percent to GDP.
While the bubble type growth of previous years has slowed it is well below the optimum levels needed to underpin Nigeria’s $300 billion plus economy.
Take the five biggest Zenith Bank, Guaranty Trust Bank (GTB), FBN Holdings, Access Bank and United Bank for Africa (UBA) that together hold a majority (57 percent) of industry assets.
Total assets for the five names were equivalent to $49.5 billion or N15.95 trillion ($1/N322) at the end of 2015.
This compares to South Africa’s FirstRand Ltd, which had total assets of $82.8 billion (ZAR1.15 trillion), equivalent to 167 percent of the top five Nigerian banks total assets.
A slump in share prices, valuation and profitability has also hit the banks since 2008.
“When we calculate economic value added (EVA) for the banks using a 19 percent cost of equity CoE no bank created value in 2009. On a cumulative basis, only GTB has created value since 2009, while all other tier 1 banks eroded value,” said Renaissance Capital bank analysts in a report released last year.
A firm’s cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.
A company that earns a return on equity in excess of its cost of equity capital has added value.
The Nigerian Stock Exchange Banking 10 Index has lost more than 60 percent of its value since 2008 compared with a 282 percent increase for South Africa’s FirstRand Ltd.
Since the financial crisis, Nigerian banks have had to deal with higher capital requirements for a given amount of assets and tighter monetary policy in the form of an increase in the cash reserve requirements -the minimum cash, as a percentage of customer deposits that each bank must set aside as a reserve.
Nigeria’s banking landscape however need not be so negative especially with the excellent growth prospects from an unbanked population estimated at 70 percent of adults and continued overall population growth.
The several headwinds and increasing risk averseness of Nigerian banks mean they often prefer to park cheap deposits in risk free government bonds than to make loans or extend financial services to the millions outside the banking system.
The Nigerian Central Banks recent interest rate hike (though justified) has only served to widen the margin between deposit and lending rates: potentially increasing bank margins while hurting lending.
This all suggests that banks need to pursue better/ more innovative business models, to help navigate the negative headwinds if they are to return to their core mandate of lending.
For instance in a country with an estimated 17 million housing shortfall banks have yet to innovatively tackle the shameful lack of mortgage loans in Nigeria.
Nigerian Banks will also need to raise capital if they are to begin to grow assets in the future.
The sector’s capital adequacy ratio fell to 14.7 percent in June from 16.1 percent in December.
For the big banks, which the regulator classifies as having more than N1 trillion ($3.2 billion) of assets, that fell to 15.65 percent, marginally above the requirement of 15 percent.
Bottom-line: For the Nigerian economy to begin to hit potential growth rates of 7 percent p.a, Nigeria’s banking sector needs to get its mojo back.
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