Despite the difficult operating environment and high running costs in an election year, Nigerian commercial banks are expected to increase their pre-tax return on equity by 23% by the end of this year, the loan portfolio of the industry expected to increase by 16.5. percent.
Agusto & Co, in its just-released 2022 banking sector outlook, said it expects 16.5% year-on-year loan growth in 2022 as more banks get a better understanding of the winds. macroeconomic opposites.
The rating agency noted the resilience shown by the Nigerian banking sector in fiscal 2021, with the sector’s loan book growing by 21% despite the weak economy and regulatory constraints.
“Notwithstanding global supply constraints, the Russia-Ukraine crisis and insecurity issues that continue to hamper food and crude oil production in Nigeria, we expect lending growth of 16.5% year-on-year in 2022. Traditional sectors such as oil and gas, manufacturing, general trade and agriculture are expected to drive lending growth given backward obligor integration initiatives, CBN intervention activities and of the import-dependent nature of the Nigerian economy.
“While arbitrary cash reserve deductions and currency illiquidity would remain limits to industry loan portfolio growth, we note that more banks are now favorably disposed to access the cash reserve window. (DCRR) to reduce the value of restricted tailings.funds with CBN.
in the short term, we believe that the quality of the sector’s assets will remain acceptable, with an impaired loan ratio hovering around 6% as of December 31, 2022. In our view, a proactive tightening of controls around the granting of loans and a Increased loan monitoring will mitigate the impact of the difficult operating climate on the loan portfolio.
While noting that the Nigerian banking sector remains well capitalized relative to the business risks involved and is expected to remain so in the near term, the rating agency said “in preparation for the full implementation of Basel III and based on plans expected growth, we expect an increased appetite for perpetual bond issuances qualifying as Additional Tier 1 capital. We also believe that some banks will raise Common Equity Tier 1 capital that will maintain the capital adequacy ratio of industry above 17%.
By the end of 2022, Agusto & Co expects the industry’s net interest margin to decline as the current low yields on government securities, which dominate the industry’s investment securities, mitigate the risk. impact of rising interest rates. “However, we expect an increase in net profit primarily due to higher trading revenue and electronic banking fees. Nevertheless, we note that the upcoming elections and the growing budget deficit have forced the federal government to modify several existing tax laws that will moderate the profits of the banking industry.
“Overall, Agusto & Co expects pre-tax return on average industry equity to increase to 23% in fiscal 2022. Our financial outlook for the industry is largely stable. short term. We believe that the sector is resilient and the current trend of banks adopting the holding company structure to diversify into other financial services segments while exercising control over subsidiaries should support the profitability of the sector.
Regarding the African Continental Free Trade Area (AfCFTA), Agusto & Co noted that this is also another vital prospect for Nigerian banks as financial institutions with a strong capital base and of an effective network across the continent are essential for the full implementation of the AfCFTA. Overall, Agusto & Co believes that the performance of the banking sector will remain subdued in the short to medium term and on this basis, our outlook for the sector is stable.