Deposit Money Banks (DMBs) have been advised to restructure their assets portfolio this year so as to continue to post strong earnings to justify their huge capital base.
The FSDH Securities Limited made this call in a report titled: “Nigerian Banking Industry – Review and Outlook as at December 2012,” obtained by THISDAY Monday.
The firm argued that the declining yields on fixed income securities would no longer make investments in treasury bills and bonds as profitable as they were in 2012, “as margins continue to thin out.”
It added: “Banks must therefore create more risk assets in 2013. The banking sector robust balance sheet, after the house cleaning exercises by the Asset Management Corporation of Nigeria (AMCON), has strengthened the capacity of banks to increase their risk assets in the near-to-medium term.
“Our review of the Capital Adequacy Ratio (CAR) of the individual banks shows that they are above the regulatory minimum level. This means that there is room to grow the risk assets of banks to support income generation.”
It advised commercial banks that needed more capital to consider taking up more of Tier 2 Capital, saying that a review of the composition of individual bank’s regulatory capital showed that there was room to increase their Tier 2 Capital.
The report predicted that banks would deliver improved dividend pay-out this year based on their anticipated 2012 audited accounts. This, it stated, would generate interest from investors.
According to FSDH, the expected take-off of merchant banking activities this month would create more opportunities for the borrowers of long term capital in the Nigerian financial market.
Commenting on the cashless policy, FSDH urged the regulators to deepen the initiative aimed at reducing the dominance of cash in the system this year. This, it pointed out, would reduce cash handling in the country and help banks to reduce cash handling cost, which will impact the bottom line.
“The decision of the Bankers Committee to remove the N100 charged customers for using another bank’s Automated Teller Machines (ATMs) will increase financial inclusion in 2013. This will attract more funds into the banking system with positive effect of reducing banks’ cost of funds,” it added.
On investment opportunities in banking stocks, the firm forecast that the emerging financing opportunities in the economy, especially in power, transportation, agriculture, wholesale and retail trade, and oil and gas would drive bank earnings going forward.
“Given the outlook in the Nigerian banking industry, investors in the sector cannot get it wrong. We see a lot of financing opportunities for Nigeria Banks in power, aviation, transportation, real estate, construction, oil & gas and manufacturing sectors of the economy.
“In addition, the large size of the retail and wholesale trade in Nigeria provides a lot of trade finance opportunities,” it added.
Continuing, the report said: “FSDH Research has argued that the cause of high inflation in Nigeria at the moment is outside monetary aggregates. Thus, pure monetary policy may not bring down inflation. In order to maintain price stability in Nigeria, Central Bank of Nigeria (CBN) adopted tight monetary policy, causing rates and yields on fixed income securities to rise.
“In turn banks re-structure their assets in favour of fixed income securities to take advantage of the attractive yields. FSDH Research is of the opinion that there is an urgent need to modify the current tight monetary policy stance, in order to address the current economic realities.
“Some structural effects have constrained the effectiveness of the current policy stance in achieving the CBN’s core mandate of price stability. In addition, further monetary tightening would be counter-cyclical to the current efforts of the CBN to direct credits to some sectors of the economy to boost sustainable economic growth.