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The outlook for the banking sector for full year 2017 and 2018, as the Nigerian financial market, remains a sweet and attractive spot for both foreign and local investors, according to Ike Chioke, group managing director/CEO, Afrinvest West Africa Limited.
Chioke notes in the 2017 Nigerian Banking Sector Report that majority of the Nigerian banks have demonstrated their resilience within the last two years amid macroeconomic challenges that weighed on credit expansion, asset quality and capital adequacy, to record largely positive performance for the year.
Speaking at a press conference Friday 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.
This, he said, was positive for banks’ non-interest income, especially Tier-1 lenders with aggregate long Net Open Positions (i.e. higher foreign currency denominated monetary assets than liabilities), which recorded massive jumps in forex revaluation gains.
In a bid to attract private capital flows and shore-up the naira and external reserves, the Central Bank of Nigeria (CBN) drove up policy and market interest rates, resulting in higher fixed income yields that bolstered interest income for banks.
Consequent on the higher interest and non-interest income, industry gross earnings (for the 14 banks within our coverage) rose faster at 16.4 percent in full year 2016 (better than 10.4% in 2015).
However, the industry still faced significant cost pressures, particularly impairment charges that surged 91.8 percent within the period as a result of weaker asset quality and the one-off forbearance on writing off fully provisioned loans granted by the CBN in 2016.
Nonetheless, profitability metrics improved as industry profit before tax (PBT) expanded 9.8% in 2016, an improvement from a 28.4% decline recorded in the prior year, while Return on Equity (ROE) strengthened to 12.3% from 9.1% in 2015.
Given the more or less resilient earnings performance, he said majority of the banks maintained their dividend policy with an average pay-out ratio of about 33% and investors netted alpha as the banking index outperformed the market benchmark.
“Our outlook on the sector for the rest of the year and 2018 is broadly positive, although we note that crystallisation of asset quality risk sill 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 and gas, manufacturing, general commerce and power sectors,” he said.
On foreign exchange, he said “we laud the introduction of the I&E FX window and the interest it has generated, with the window becoming the preferred market for FX transactions by local and foreign portfolio investors.”
