PoliticsNews & AnalysisNigerian optimism returns as reforms yield results


Posted on Wednesday, 19 September 2012 11:56

Nigerian optimism returns as reforms yield results

Central bank governor Lamido Sanusi has stressed the need for the establishment of more middle-sized banks/Photo©ReutersThe heavy write-down that Nigerian banks had to take on their books last year meant a healthier crop of results this year, signs the sector reforms are finally starting to bite.

Nigeria's banking sector is showing long-overdue signs of recovery as many shares of the top banks jumped this year, supported by solid first half earnings.

Analysts and frontier market hedge funds have been saying for years that Nigeria's banks are under-valued and ripe for returns, but the lingering eurozone downturn and a nervous hangover from Nigeria's 2008/2009 banking crisis have meant investors have so far stayed away.

The initial optimism after the bailouts in 2009 waned as banking stocks fell 30% last year, reversing an earlier recovery. The writing down of bad loans restricted progress in 2011 but at the end of the first half of this year, banking stocks were on the up with the index of the top 10 lenders climbing more than 20% year-to-date.

Regulatory bodies have given Nigeria's banking sector the thumbs up, and tentative optimism remains with experts saying longterm success can only be achieved by further regulatory reform and disciplined fiscal and monetary policy. Nigeria is still highly dependent on oil revenues and recent price dips and a volatile currency performance act as reminders of the rocky road ahead.

Bank shake-up

Eight of the country's 24 banks had to be rescued in 2009 after non-performing loans affected more than a third of total loans across the banking system.

Lending rates in the low to mid 20s [%] for many corporates outside the blue chip category means that credit remains out of reach for many

Nigeria's Central Bank stepped in, removing executive management teams from failed banks and setting up a 'bad bank' Asset Management Company of Nigeria (AMCON).

Ten bailouts, $21bn and several mergers later, the sector is slowly recovering. AMCON is now considering listing three lenders that were nationalised, looking to determine a fair value for the banks instead of selling them to rivals.

Ratings agency equivocation

While the western financial markets were hit by successive downgrades this year, Nigeria faired much better with the ratings agencies. Some of the world's leading rating agencies, including Fitch, Standard and Poor's and Agusto – the foremost rating agency in Nigeria – upgraded Nigeria's Access Bank, which is still basking in the success of its acquisition of the rescued Intercontinental Bank.

Since the absorption of Intercontinental, Access has seen healthy profits, its branch network tripling from 103 branches to 310, including some offshore, while the customer base has jumped from 1.2 million to 5.7 million since 2010.

The rating agencies noted that other Tier 1 banks performed well, with First Bank, Zenith, Guaranty Trust Bank and United Bank for Africa maintaining a 'stable outlook.' Standard and Poor's said in its report in March that Nigeria's banks were "again engaging with the domestic economy. Nigeria now has fewer, but larger, banks with better corporate governance and regulatory oversight ... As a result of the efforts, the industry and its regulation have improved significantly."

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But a late July special report by Fitch again raised the alarm over rapid credit growth that could lead to a repeat of the 2009 crisis. "Fitch believes that internal capital generation needs to be addressed in the sector as the generous dividend policies demanded by investors are not conducive to sustainable loan book growth in the medium-term," it said.

And, according to emerging markets focused Renaissance Capital, the pressing question on most investors' minds is 'Are the loan books now clean?'

Nigerian banks have concentrated on lending to blue chip companies, particularly in the oil and telecoms sectors. With the fall in the price of crude oil, which tumbled from around $120 a barrel to $90 in April, there is an increasing risk of default by refined products importers unable to sell. Despite this, lenders are still reluctant to diversify their loan base in such an oil dependent economy.

Big lenders might be making nice returns on interbank lending and higher returns on government securities, but small and medium-size banks are still struggling and, overall, loan growth has been disappointing.

"Lending rates in the low to mid 20s [%] for many corporates outside the blue chip category means that credit remains out of reach for many," says Rele Adesina, head of corporate and investment banking research at Stanbic IBTC Bank.

In its latest report on Nigerian banks, Renaissance Capital cut its forecast of 23- 30% sector loan growth, down to 15-20%, arguing that commercial banks have become risk averse and prefer to opt for investment in fixed income securities such as treasury bills.

The high cost structure and poor viability of SMEs does not help, but banks will have to devise ways of making companies more attractive, as their reluctance to lend will constrain sustainable economic development in Nigeria.

SME financing

Central bank governor Lamido Sanusi has stressed the need for the establishment of more middle-sized banks (Tier II banks) that will concentrate on lending to small and medium sized enterprises.

But Tier II banks are currently competing with Tier I banks for accounts with Shell, Chevron and other oil companies. Sanusi maintains that SMEs remain the en- gine for growth for the economy and have to be supported to achieve the level of development needed.

Microfinance banks must face stress tests before they will be eligible to distribute funds to SMEs. Sanusi's determined effort to curb high inflation and improve accountability should lead to sustainable lower borrowing costs in the medium-term.

"Strengthening the rule of law, improved prospects of identifying individuals and tracking them as well as lower inflation levels that allow for sustainably lower borrowing costs will better enable retail and SME lending", says Adesina.

Such is the weighting towards banks in Nigeria's stock mar- ket, the sector's performance has become the barometer for the strength of investment sentiment in Africa's most populous nation and biggest oil producer.

Nigeria was once a boon for frontier investors, with one of the best performing stock markets on the planet.

At its height in 2006/07, it was trading $100m a day, compared to around $15m now. Nigerian stocks remain reliant on international investors, which ties performance to global risk sentiment and keeps the stock market illiquid and unattractive to a broader range of investors.

Oil still King

Expectations are that the top tier banks will perform well and sector growth will remain skewed towards safer areas like oil and gas, together with power and infrastructure. If the government can deliver on its efforts to modernise the agriculture sector – which makes up 40% of Nigeria's GDP – there are opportunities for returns.

Although Nigeria's banking sector has upward momentum, investors remember well the disappointments of the not too distant past. The stability of the oil price and naira currency will remain strong deciding factors in the sector's success during this year●

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