Agusto & Co. has projected that total banking industry loan will rise by between 12 and 15 per cent in 2021 on the Central Bank of Nigeria’s (CBN) aggressive real sector interventions as well as its expected naira devaluation.
The pan-African rating agency, in its ‘2021 Outlook for the Nigerian Banking Industry,’ stated that pressure by banks to meet up with the minimum loan-to-deposit ratio (LDR) and risk assets created by the relatively new banks (those licensed in the last six years) will further support loan growth in the year.
It also did not expect the industry’s impaired loan ratio to exceed 9.6 per cent as of December 31, 2021.
“2020 financial year was a challenging one for the Nigerian banking industry. The coronavirus pandemic and some heterodox policies of the Central Bank of Nigeria impacted the industry’s performance negatively,” the report said.
“Conversely, the regulatory forbearance, the extension of the moratorium on intervention loans and other measures introduced by the apex bank supported the industry.
“The issuance of securities as a refund of the excess cash reserve requirement (CRR) debits in December 2020, relieved the liquidity pressure on banks, albeit to an extent,” it added.
The ratings agency said 2021 would be a year of two halves for the banking industry and the economy at large, adding that the lingering adverse impact of the pandemic, exacerbated by the second wave, was expected to dominate the first half of the year.
“However, mass vaccination, clarity on OPEC’s pricing strategy and a better understanding of the coronavirus are expected to moderate the headwinds in the second half of the year. In our view, the year will be a mixed bag for the industry and this will be reflected in its asset quality, earnings, liquidity, and capital position,” it stated.
The firm said it expects a gradual increase in interest rates, particularly in the second half of the year. It anticipated a 56 per cent net interest spread, higher than the 50.1 per cent it had estimated for full-year 2020, given that loan pricing was more sensitive to upward movements than funding costs.
“Net earnings will also benefit from debt instruments (bonds and commercial papers) issued by banks at record low-interest rates in 2020, coupled with the expected 400 basis points increase in the pricing for intervention loans by March 2021.
“In our view, investments in electronic banking platforms, growing adoption of the digital banking channels and the expanding online community will continue to drive non-interest income. The industry is expected to consolidate on cost-efficiencies elicited by the pandemic, although we foresee additional technology costs, which are largely dollar-denominated, as most banks scaled up on electronic tools platforms. Overall, we anticipate a 21.8 per cent average return on equity for the 2021 financial year,” it added.
Augusto said expects a significant improvement in the industry’s foreign currency liquidity position in 2021.
“The banking industry’s capital was pressured in 2020 by additional provisions elicited by the deterioration in most macroeconomic variables. However, long-term bonds issued by some banks provided a capital buffer.
“In 2021, we expect this trend to continue to support capital, provide liquidity and reduce the asset-liability mismatches on the balance sheet. We foresee the initiation of capital raising exercise by some tier II and III banks in anticipation of the CBN planned increase in the minimum capital of banks.
“The asset growth plan of banks will also propel the capital raising exercise. However, successful implementation of the capital raising exercises will be challenging based on the general apathy to equity by the investing public.
“Overall, we anticipate a better year for the industry, compared to the prior one on the back of a more supportive regulatory environment, a better understanding of the macroeconomic environment, positive economic growth and cost efficiencies elicited by the pandemic. “Notwithstanding, we believe some of the challenges in the industry will still linger,” it added