Bank equity returns, lending up 23%, 16.5% in 2022 – report

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Despite the difficult operating environment and high running costs in an election year, commercial banks in Nigeria are expected to increase their pre-tax return on equity by 23 percent by the end of this year as the industry’s loan book is expected to grow 16.5 percent.

Agusto & Co, in its just-released 2022 banking industry outlook, said it expects 16.5 percent year-on-year loan growth in 2022 as more banks better understand macroeconomic headwinds.

The rating agency had noted the resilience of Nigeria’s banking industry in fiscal 2021 as the industry’s loan portfolio grew 21 percent despite the weak economy and regulatory restrictions.

“Despite prevailing global supply shortages, the Russian-Ukrainian crisis and uncertainty challenges that continue to hamper food and crude oil production in Nigeria, we expect 16.5% yoy credit growth in 2022. Traditional sectors such as oil and gas Manufacturing, general trade and agriculture sectors are expected to drive credit growth given borrowers’ backward integration initiatives, CBN intervention activities and the Nigerian economy’s import dependency.

“While indiscriminate cash reserve deductions and foreign exchange illiquidity would remain constraints on the growth of the industry’s loan portfolio, we note that more banks are now willing to access the differential cash reserve requirement (DCRR) window to measure the value of sterile Restrictions reduce funds with the CBN.

In the short term, we believe industry asset quality will remain acceptable, with the non-performing loan ratio hovering at approximately 6 percent as of December 31, 2022, reflecting the challenging operating environment for the loan portfolio.”

While the rating agency noted that the Nigerian banking sector remains and should remain well capitalized relative to the business risks taken in the near term, the rating agency said: “In preparation for the full implementation of Basel III and based on planned growth plans we anticipate an increased appetite for issuance of perpetual notes that qualify as additional Tier 1 capital. We also believe that some banks will raise Tier 1 hard capital that will keep the industry’s capital adequacy ratio above 17 percent.”

By the end of 2022, Agusto & Co forecasts a decline in the industry’s net interest margin as the prevailing low government bond yields, which dominate the industry’s investments, mitigate the impact of rising interest rates. “However, we expect net income to increase, driven primarily by higher trading income and e-banking fees. Nonetheless, we note that the upcoming elections and growing budget deficit have forced the federal government to amend several existing tax laws, which will hurt the banking industry’s profits.

“Overall, Agusto & Co expects the industry’s average return on equity before taxes to increase to 23 percent in the 2022 financial year. Our financial outlook for the industry is broadly stable in the near term. We view the industry as resilient and the current trend of banks adopting the holding structure to diversify into other financial services segments while exercising control over subsidiaries should support industry profitability.”

Regarding the African Continental Free Trade Area (AfCFTA), Agusto & Co noted that this is also another key perspective for Nigerian banks, as financial institutions with a strong capital base and an efficient network across the continent are required to fully implement the AfCFTA are essential. Overall, Agusto & Co believes that the performance of the banking industry will remain moderate in the short to medium term and on that basis our outlook for the industry is stable

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