Despite the resilience of Nigeria’s banking industry amid COVID-19 and several regulatory headwinds, banks’ earnings and asset quality are expected to remain fragile with loans rising by 15 per cent at the end of 2021.
This was the view of analysts at Afrinvest in its 2021 Nigerian banking sector report, with experts urging the Federal Government to look at ways of ending crisis in the foreign exchange (FX) and infrastructure deficit in the country.
Speaking during the launch of the 2021 banking report in Lagos on Wednesday, the Deputy Managing Director, Afrinvest West Africa Limited, Victor Ndukauba, revealed that Nigerian banks delivered a 15.6 and 6.8 per cent year-on-year (y/y) growth in total assets and profit respectively in the first half of 2021 despite elevated Cash Reserve Ratio (CRR) debits and compulsory Loan-to-Deposit (LDR) levels.
He noted that with the pandemic, the Nigerian banking sector’s vulnerability heightened and requiring swift policy responses from the Central Bank of Nigeria (CBN) which response necessitated a real GDP growth of 13.3 per cent y/y in the financial institutions’ sector.
Ndukauba further explained that deposits reduction in both consumer and business segments, exposure to currency risk and increased credit default, affected banks’ earnings in Nigeria.
“Consequently, aggregate gross earnings for the banks within Afrinvest’s coverage (5 Tier-1 and 8 Tier-2 banks) marginally grew by 2.8 per cent in 2020 relative to 9.9 per cent in 2019.
Meanwhile, earnings weakened as the industry’s profit before tax (PBT) fell 2.3 per cent from a growth of 13.2 per cent in 2019 with profit after tax (PAT) slightly growing by 0.4 per cent y/y compared to 13.1 per cent in 2019.
In terms of asset creation, the banks under our coverage grew loan books by 16.3 per cent y/y to N24.6 trillion from N21.2 trillion in 2019, as banks aimed to achieve the CBN’s LDR target (65.0 per cent )”, he said.
Highlighting key outlook for the sector, Ndukauba said earnings by banks in Nigeria will remain fragile, adding that Afrinvest expects a 15.0 per cent growth in industry loans and advances as the economic recovery strengthens and banks can drive growth in deposits.
According to him, compliance with the CBN’s LDR directive will not be a big driver for loan growth as banks place a higher premium on quality risk asset creation over the punitive measure for non-compliance.
“With the improvement in macroeconomic conditions, we expect a lesser deterioration in asset quality based on the ECL model. We note that the CBN has extended its regulatory forbearance for loan restructuring.”
However, the viability of most of the restructured loans is still questionable.