Leading rating agency Agusto & Co said that the banking sector’s loan book climbed by 27% in the 2022 fiscal year, a feat made possible by greater activity at the differentiated cash reserve requirement (D-CRR) window, a larger deposit base, and the depreciation of the naira.
The agency said in its 2023 assessment on the Nigerian banking sector that despite regulatory challenges that limited its performance during the previous three years, the sector has persevered.
The agency claims that the banks have supported this expansion with extra investments in capital raising and credit risk management. The agency identified the adoption of the financial holding company structure, the upgrading of banking licenses, partnerships with domestic and international development finance institutions (DFIs), and innovation and malleability of the banks as factors driving growth.
However, the agency noted that given the decreased consumer spending power and declining margins in several industries, some pressures on asset quality are foreseen.
However, it expressed optimism that the industry’s non-performing loan (NPL) ratio will stay below 5% in its full 2023 year performance, with a rise of 520 basis points in return on equity to 26.8%, as many banks used their prior experiences with recessions and pandemics to navigate the cycle.
Additionally, it was suggested that despite expectations for a near-term increase in operating costs due to inflation, the business is not completely immune to the whims of the economy.
The organization thinks the industry will grow as a result of the new government’s numerous reforms, which include the elimination of the gasoline subsidy, exchange rate harmonization, tax reforms, and the restoration of a framework for calculating the cash reserve requirements (CRR).
The agency further confirmed that the banking sector was well-positioned to gain from the huge naira devaluation that followed the decision to harmonize the different exchange windows, which allowed banks to post sizable gains in foreign exchange.
“We believe that many banks will take advantage of rising liquidity following the eradication of arbitrary CRR debits to grow the loan book, especially since the working capital needs of businesses continue to rise given the weakening domestic currency and other inflationary pressures. Agusto & Co expects performance by the Nigerian banking industry to be positive.”
“Also, with the reversal to normalcy concerning CRR debits and foreign currency illiquidity, many banks have witnessed a rise in available funding for risk asset creation and we believe this would be exploited to boost interest income and ancillary earnings through the treasury function”, it stated.
