Published On: Sun, Apr 22nd, 2018

Nigerian banks must grow risk-weighted assets to remain competitive, says Coronation Merchant Bank report

FELIX OLOYEDE

Ability to create risk asset creation in the real sector would set apart leaders of the Nigerian banking industry over the next three years, a new report from Coronation Research, a part of Coronation Merchant Bank Group has stated.

The report released last week claimed that while the quality of asset in the industry has improved, the best capitalized banks would continue move well ahead of their competitors.

“For two years, Nigerian banks have had an easy time, earning good income on risk-free government-backed, Naira-denominated securities. That era is drawing to a close as T-bill rates fall. Asset yields are trending south, and it is almost impossible to re-price liabilities to match. So, banks must either find other sources of income or face an average 15% drop in their Profits Before Tax expectation for 2018. For the banks to replace the portion of income threatened by declining yields on securities, they must grow risk-weighted assets. This means a 6-12% rise in customer loans in 2018,” Guy Czartoryski, Head of Research, Coronation Research declared.

The report indicated that 2018 presents a golden opportunity for the stronger banks to expand loan books and gain market share, adding that Nigerian banks are coming off a low base: lending (when adjusted for currency depreciation) has hardly grown over two years, but the economic conditions look good for renewed loan growth.

It noted that loan growth, over the last two years, has been far from impressive and understandably so, since banks have remained cautious as they have grappled with the effects of oil price volatility and its impacts on their loan books.

“Even though we believe the underlying pressure on loan assets is getting lighter, there is still IFRS 9 to contend with. We expect a one-off uptick in impairment charges this year, given that banks will start reporting using IFRS 9 this quarter. With oil prices largely stable and our optimistic economic outlook for 2018, we view the risk to banks’ oil portfolios as significantly reduced. Also, the stability in the foreign exchange market, coupled with renewed economic growth, significantly mitigates the risks associated with the trading and manufacturing sectors of the economy,” Coronation Research maintained in its report.

It mentioned that bank in the short to medium term have limited ability to expand their loans books and will most likely focus on dealing with capital issues and might attempt to raise long term capital from the capital market.

“If equity markets are sufficiently strong, some banks might attempt equity capital increases (Tier-I) this year. However, currently we have market valuations so low as to make equity capital dilute the interest of existing shareholders. So, the preferred capital-raising route is likely to be long-term subordinated debt (Tier-II). We expect market share in customer lending to flow from banks in Group C towards those in Group A. With banks in Group B we see some, but perhaps not significant, market share gains.”

The report categorizes banks into three tiers; Group A, Group B and Group C. Banks in Group A, being the most well capitalized, have the biggest opportunity to increase consumer lending.

According to the report, Group A includes Zenith Bank, GT Bank and Stanbic IBTC, which have the ability to significantly expand their loan books by 69 per cent, 82 per cent and 182 per cent respectively. Group B, including UBA, Access Bank and Fidelity Bank, have moderate capital levels and some ability to expand loans books but may also pursue tier II capital raise in the form of long-term subordinated debt. Group C, including FBNH, Diamond Bank and Sterling.

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