By Chinwendu Obienyi
Despite the volatile environment in Nigeria in 2023, banks benefitted significantly as the sector recorded a gain of N2.6 trillion from FX trading and revaluation due to favourable net FX positions.
According to the 2024 Afrinvest Nigerian Banking Sector Report launched recently, reforms promoting a cashless economy spurred a 71.7 per cent increase in deposits, positioning banks to benefit from earlier interest rate hikes.
The report stated that reforms initiated in 2023 following the commencement of a new political cycle and key changes to core economic management teams, promised to steer the economy back on track – but not without significant pains.
However, overdue-but-poorly-implemented policy decisions to remove energy subsidies and overhaul the exchange rate management system, among others, resulted in immediate price and currency volatilities.
These, the report stated, along with sharp interest rate hikes in H2 2023, toughed headwinds for businesses operating in an economy without adequate infrastructure support, rife with insecurity, and in dire need of sector-specific policy rework.
Furthermore, real sector players suffered historic underperformance as firms booked significant losses owing to FX and interest rate pressure, as well as pressure on sales.
The report said, “In contrast, banks gained N2.6 trillion from FX trading and revaluation owing to favourable net FX positions. Also, “reforms targeted at accelerating the cashless economy drove a sharp upturn in deposits, up 71.7 per cent to the highest levels in well over a decade and positioned banks to rake significant gains from Monetary Policy Rate (MPR) hikes earlier in the year.
As a result, listed banks experienced a threefold increase in Earnings Per Share (EPS), reaching N11.5 from N3.7 in 2022, with the financial institutions sector growing by 28.9 per cent”.
Analysis of the report showed that the financial institutions sector emerged as the second-fastest growing sector in 2023 (28.9 per cent vs 17.2 per cent), with a GDP acceleration, unlike many other sectors that faced either growth slowdowns or declines.
Akin to the contrast between banks and real sector players, it noted that it identified significant disparities in outcomes within the banking sector – with critical implications for competitiveness as banks begin recapitalisation.
“This disparity is reflected in the uneven distribution of profits, with major banks (FUGAZ) accounting for 79.3 per cent of industry PBT and 80.8 per cent of industry PAT, up from 69.0 per cent and 71.1 per cent respectively in 2022. While differences in scale economies and brand strength partially explain these outcomes, declining competitiveness could upend credit drive towards a trillion-dollar economy.
Notably, Tier-2 banks tend to focus more on credit creation than Tier-1 banks. For example, the Loan-to-Deposit Ratio (LDR) for Tier-1 banks was 47.2% while Tier-2 banks allocated 61.3% of deposits to loans.
Understandably, riskiness in the domestic economy has intensified over the past year, leading Tier-1 banks
with substantial loan portfolios and a high NPL ratio (4.4%) to adopt a more conservative stance”, Afrinvest revealed.
This emphasizes the need for policymakers, both in the
financial and the public sectors to synchronize efforts towards derisking the real sector so banks can
adequately fund the trillion-dollar economy ambition, having adequately recapitalised.
“That said, the banking industry outlook remains broadly positive
albeit as we anticipate continued EPS expansion buoyed by cost efficiency of industry players, attractive yield environment, and optimisation of the
industry’s robust balance sheet”, the report concluded.