Nigeria’s banking industry loan portfolio is expected to grow by 16.5 per cent in 2022, Agusto & Co Limited has said.
The pan-African credit rating agency made the projection in its 2022 Nigerian Banking Industry Report, expressing concern that Nigeria’s forthcoming elections and growing budget deficit have forced the Federal Government of Nigerian (FGN) to modify several extant tax legislations, which would have a significant influence on the banking industry.
“We anticipate a 16.5 per cent year-on-year loan growth in 2022 as more banks now have a better understanding of the macroeconomic headwinds,” the agency said, noting that Nigerian banking industry showed resilience in full year 2021, as the industry’s loan portfolio grew by 21 per cent despite the weak economy and regulatory constraints.
It noted, notwithstanding, that the prevailing global supply constraints, the Russian-Ukraine crisis and insecurity challenges that continue to hamper food and crude oil production in country,
It stated that traditional sectors such as oil and gas, manufacturing, general commerce and agriculture sectors were expected to drive the loan growth given the backward integration initiatives of obligors, the intervention activities of the CBN and the import-dependent nature of the Nigerian economy.
While the arbitrary cash reserve deductions and foreign exchange illiquidity would remain limitations to the growth of the industry’s loan portfolio, Agusto & Co said it noted that more banks were now favourably disposed to accessing the differentiated cash reserve requirement (DCRR) window to reduce the value of sterile restricted funds with the CBN.
In the near term, Agusto & Co believe the industry’s asset quality would remain acceptable, with the impaired loan ratio hovering around 6percent as at 31 December 2022.
“In our view, a proactive tightening of controls around loan origination and intensified loan monitoring will moderate the impact of the tough operating climate on the loan portfolio,” asserting that Nigeria’s banking industry remains well capitalised relative to the business risks undertaken and should remain so in the near term.
“In preparation for the full implementation of Basel III and based on the scheduled growth plans, we expect an increased appetite for perpetual bond issuances which qualify as additional tier-1 capital. We also believe that some banks will raise common equity tier 1 capital that will keep the industry’s capital adequacy ratio above 17percent,” it said.
Agusto & Co projects a decline in the industry’s net interest spread in FY 202 as the prevailing low yields on government securities, which dominate the industry’s investment securities, will moderate the impact of the uptick in interest rates. However, we anticipate an increase in the net earnings driven largely by higher trading income and electronic banking fees.
“Nevertheless, we note that the forthcoming elections and growing budget deficit have forced the FGN to modify several extant tax legislations which will moderate the banking industry’s profits. Overall, Agusto & Co expects the industry’s pre-tax return on average equity to increase to 23percent (FY 2021: 20.6 per cent) in FY 2022.
The African Continental Free Trade Area (AfCFTA) is also another vital prospect for Nigerian banks, it said, given that financial institutions with a strong capital base and efficient network across the continent are essential for the full implementation of AfCFTA.
Overall, Agusto & Co believes the banking industry’s performance will remain moderate in the short to medium term and on this basis, our outlook for the industry is stable.
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