As yields from federal government treasury bill continued to fall, banks in the country must find other sources of income and grow their risk assets in the real sector to survive, the Head, Coronation Research, Mr. Guy Czartoryski, has said.
In its 2018 Forecast for Nigeria Banks, Coronation Research, which is a part of Coronation Merchant Bank said the ability to support risk asset creation in the real sector will differentiate winners from losers in the Nigerian banking industry over the next three years.
â€œFor 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 per cent 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,â€ Czartoryski said.
The report categorised banks into three tiers: Group A, Group B and Group C. Banks in Group A, being the most well capitalised, have the biggest opportunity to increase consumer lending. According to the report, they are 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 FBN Holdings , Diamond Bank and Sterling 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.
According to Coronation Research, â€œIf 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.â€
Coronation Research added leaving capital raising aside, 2018 presents a golden opportunity for the stronger banks to expand loan books and gain market share.
â€œNigerian 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. 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,â€ it said.