2021: Overview of Nigerian Banking, Strength& Resilience amidst Pandemic Constraints

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Right from the start of the year, the Nigeria banking sector dominated M&A activities, the sheer bulk of the industry’s participation coming from Access Bank, which completed four acquisitions and one merger in markets as far-flung as Mozambique, South Africa, Botswana and Zambia. BUSINESS EDITOR NIYI JACOBS,  in this report also writes on the Comparison of Nigerian Banks with BRICS and SSA Banks in the year 2021, considering ther strength, stability and  resilience admits pandemic effect.

The scope of Access Bank’s expansion vision seems to know no bounds, and the lender has stated its grand plan to break into markets in eight countries on the continent in its quest to become “Africa’s gateway to the world,” hoping to ride on the back of the African Continental Free Trade Area agreement.

On the strength of the latest push, the financial institution is probably the continent’s fastest-growing bank at cross-border level, given that it delivered two acquisitions in Cameroon and Kenya last year and is in line to ink more deals in the year ahead as it looks to conquer Africa.

That won the lender’s chief, Herbert Wigwe, African Banker of the Year award in June for the second year in a row.

The South African acquisition, even though it was not a complete acquisition, accounted for $60 million of Nigeria’s biggest lender by asset’s capital expenditure for the year.

“We’re basically making sure that we have a strong presence in all the major trade centres in the continent,” Mr Wigwe told CNN in December 2021.

“I think we’re on track. I think in terms of profitability our different franchises are doing exceedingly well, and I think 2022 perhaps is actually going to be a big, big year for the institution.”

Titan Trust Bank

But the upset of the year and perhaps the high point of doing deals in Nigeria in recent years was Titan Trust Bank’s late December launching of a takeover bid for Union Bank.

That came after the acquirer sealed a share purchase pact for an 89.4 per cent holding, a push that could put the 107-year-old Union in danger of extinction.

The reverse takeover signposted the first time a private bank in Nigeria would be acquiring a listed bank.

Comparison of Nigerian Banks with BRICS and SSA Banks

Using CAMEL (Capital adequacy, Asset quality, Operational Efficiency, Profitability and Market Valuation) analysis, we modeled tier-1 Nigerian banks compared to their SSA and BRICS peers. From the analysis, the following can be inferred:

 Capital Adequacy: CAR of selected SSA (19.2%) and BRICS (17.2%) banks recorded was above the 8.0% global regulatory minimum under the BASEL III, reflecting effective risk management during the pandemic.

However, African peers such as Egypt (21.7%), Ghana (20.2%) and South Africa (19.8%) were better capitalized than the Nigerian banks (19.7%). In the BRICS region, the Nigerian banks fared better than its peers save South Africa.

Asset Quality: The negative impact from COVID-19 on risk assets weighed on SSA and BRICS banks leading to a substantial rise in impairment charges. The average CoR of selected SSA and BRICS bank stood at 2.6% and 2.4% respectively. Kenya banks (3.6%) reported the highest average CoR among the banks in the SSA region, trailed by South Africa (3.5%). Equally, across the BRICS region, the Brazilian banks (3.9%) remained the worst performer reflecting the higher business risk environment. The Nigerian tier-1 banks (1.8%) performed relative better than its peers save Egypt (1.7%), Morocco (1.7%), Russia (1.4%) and China (1.0%).

Operational Efficiency: Across the SSA and BRICS region, the average cost to income (CIR) for most banks is quite high. In the SSA region, the Nigerian banks (58.0%) were the worst performers given the rise in operating expenses and moderation in operation income. Nevertheless, Egypt (35.8%) maintained the top spot, trailed by Ghana (51.5%) and Kenya (52.7%). Across the BRICS region, Chinese banks remained the most efficient with an average CIR of 34.8% while Brazilian banks (77.3%) came in at the bottom.

Profitability: Surprisingly, across both SSA and BRICS regions, Ghanaian banks reported the best ROE and ROA of 23.1% and 3.5% respectively due to better-thanexpected operational efficiency within the period. Despite the heightened macroeconomic vulnerabilities to operate business, Nigerian banks emerged the best among its BRICS peers with an average ROA and ROE of 15.9% and 1.8% respectively.

Market Valuation: The Price-to-Earnings (P/E) and Price-to-book value (P/BV) ratios for the selected Nigerian banks settled at 5.4x and 0.5x respectively relative to SSA (18.6x and 1.5x) and BRICS (11.7x and 1.6x) averages. This implied that Nigerian banks are still relatively undervalued, even as the Nigerian Exchange Limited recorded a strong performance in 2020.

FY:2021 Crystal Ball

Broadly speaking, is safe to conclude that the Nigerian banking sector remained resilient in the face of COVID-19 and several regulatory headwinds. Nevertheless, banks’ earnings and asset quality have taken a beating while being under pressure from competition. Also, the pandemic has provided learning points for players in the sector to reshape and reimagine their product/services offerings for longterm growth and sustainability.

 As the broader economy recovers, regulators are expected to relax the support given to the financial system which might affect some segments of the bank’s business. The banking sector faces a continuous period of uncertainty, and the resilience of the sector would depend on players’ response to new developments. To this end, we highlight key outlook for FY:2021.

1. Earnings Performance to Remain Fragile: Despite the rising Naira interest rate trend so far in 2021 (against 2020 when it crashed), we do not expect a significant improvement in banks’ operating terrain. While the banks have shown historically that they can defend NIMs through different interest rate cycles, we expect the CBN’s continued cash sterilisation via CRR debits and punitive measures for 65% LDR non-compliance to tame the prospect for strong growth in the short term.

2. Loan Book Growth Amid Expectation of Asset Quality Deterioration: We expect a 15.0% growth in industry loans and advances as the economic recovery strengthens and banks can drive growth in deposits. Compliance with the CBN’s LDR directive will not be a big driver for loan growth in our view 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.

3. Increased Digitalization: With the pandemic, the adoption of digital banking channels recorded a significant increase. Even with the relaxed restriction, this trend has continued as observed from our 2021 banking survey. We expect this growth to be sustained in 2021 and beyond as increased internet and mobile penetration would result in higher transaction volumes resulting in higher income from digital channel. This would also drive operational efficiency and lower the cost of operating a branch system. However, to capture the full benefits of digitization, banks have to make continued investments in infrastructure resulting in higher costs of maintenance which we expect would mute the savings from operational expenses. Also, tussle with Fintech players in terms of innovation and volume hinder banks’ earnings potential through this medium.

4. BASEL III Implementation to Elevate Capital and Liquidity Levels: The implementation of the BASEL III guidelines in November 2021 is expected to have implications for banks in terms of a tradeoff between having solid capital base and dividend payouts, high liquidity and strong margins and loan growth. It is our view that the guideline would help in controlling liquidity, make banks stronger and more resilient during period of stress given that it addresses issues on minimum liquidity coverage ratio (LCR), capital adequacy and system risk. For banks to comply with the LCR criteria, bank would have to hold higher liquid assets while decreasing proportion of long-term debts. This will hinder banks’ ability to create higher margins over the long-term. The implementation of Basel III requires a stronger and higher Tier-1 capital to absorb unanticipated shocks. To this end, we expect banks with weaker Teir-1 capital levels to increase retained earnings as current environment is not very supportive of equity raise combined with the already elevated issued share capital of most banks.

Largely operating in the shadow since it got a national banking permit in 2018, Titan Trust has strategically positioned itself as a challenger bank with a heart for big things, backed by Tropical General Investment Group, which in 2019 sold Chi Limited (manufacturer of Chi Exotic Juice) to Coca Cola Nigeria in a deal reckoned to be around $1 billion.

In July, the FCMB Group announced its takeover of the majority shareholding in AIICO Pensions, translating to a 60 per cent stake that came from purchasing 33.9 per cent shares from the pension firm and the rest 26.1 per cent from a set of other investors.

The financial services group already operates a pension unit FCMB Pensions Limited and would hope to firm up its footprints on the Nigerian insurance landscape with the new acquisition.