Loan growth in the banking sector is limited by foreign exchange scarcity and Cash Reserve Requirement (CRR) deductions as stipulated by the Central Bank of Nigeria (CBN), Agusto & Co. report has said.
In its Nigerian Banking Industry Report, the rating agency said more banks are favourably disposed to accessing the differentiated cash reserve requirement (DCRR) window to reduce the value of sterile restricted funds with the CBN.
It said the yearly report provides a comprehensive review of the country’s banking industry and its near-term expectation.
Agusto & Co. notes the the resilience shown by the banking industry last year, as itss loan portfolio grew by 21 per cent despite the weak economy and regulatory constraints.
“Notwithstanding the prevailing global supply constraints, the Russian-Ukraine crisis and insecurity challenges that continue to hamper food and crude oil production in Nigeria, we anticipate a 16.5 per cent year-on-year loan growth in 2022 as more banks now have a better understanding of the macroeconomic headwinds,” the report said.
Traditional sectors such as oil and gas, manufacturing, commerce and agriculture sectors are expected to drive the loan growth given the backward integration initiatives of obligors, the intervention activities of the CBN and the import-dependence nature of the economy.
In the near term, agency said, it believed the industry’s asset quality would remain acceptable, with the impaired loan ratio hovering around six per cent as at last December 31.
“In our view, a proactive tightening of controls around loan origination and intensified loan monitoring will moderate the impact of the tough operating climate on the loan portfolio.
“Nigeria’s banking industry remains well-capitalised relative to the business risks undertaken and should remain so in the near term. In preparation for the full implementation of Basel III and based on the scheduled growth plans, we expect an increased appetite for perpetual bond issuances which qualify as additional tier 1 capital.
“We also believe that some banks will raise common equity tier 1 capital that will keep the Industry’s capital adequacy ratio above 17 per cent,” it said.
For the year, Agusto & Co projects a decline in the industry’s net interest spread as the prevailing low yields on government securities, which dominate the industry’s investment securities, will moderate the impact of the uptick in interest rates.
However, it anticipated an increase in the net earnings driven largely by higher trading income and electronic banking fees.
“Nevertheless, we note that the forthcoming elections and growing budget deficit have forced the FGN to modify several extant tax legislations which will moderate the banking industry’s profits. Overall, Agusto & Co expects the industry’s pre-tax return on average equity to increase to 23 per cent in 2022,” it said.
“Our financial prospects for industry are largely stable in the near term. We adjudge the industry as resilient and the current trend of banks adopting the holding company structure to diversify into other financial services segments while exercising control over subsidiaries should support the Industry’s profitability.”
“The African Continental Free Trade Area (AfCFTA) is also another vital prospect for Nigerian banks given that financial institutions with a strong capital base and efficient network across the continent are essential for the full implementation of AfCFTA. Overall, Agusto & Co believes the banking industry’s performance will remain moderate in the short- to medium-term and, on this basis, our outlook for the industry is stable.”