President Abdelaziz Bouteflika's inner circle played a key role in his 11 March decision not to run for a fifth term amidst vast national protests calling for the end of this presidency and the system that has kept him in place.
Nigeria: A fragile recovery
Since Nigeria’s economy rebounded from a year-long recession in the second quarter of 2017, the outlook for the country’s banks has become brighter. However, concerns remain that the fragile recovery, which is down to the resurgence of oil prices, could be upended by a price slide.
Many banks showed some resilience, growing profits throughout the recession, and they are expected to keep up the trend in 2018, albeit at a lower rate of growth relative to the previous year. This is mainly due to the decline in yields on government securities, which have been a major source of interest income for the banks over the past two years. The Central Bank of Nigeria (CBN) has recently cut back on issuing securities after embarking on an aggressive programme aimed at funding the national budget deficit in the past couple of years. This has precipitated a decline in yields.
Top banks such as Zenith Bank (#21) and Guaranty Trust Bank (#37) recorded a 37% and 29% increase in profit after tax in 2017, respectively. Meanwhile, mid-tier banks Stanbic IBTC (#74)and Sterling Bank (#93) saw increases of 70% and 65%, respectively, in the same period.
Analysts do not expect such growth rates in 2018. Robert Omotunde, head of investment research at Lagos-based Afrinvest Securities, says new avenues for income have to be explored. “The banks will just have to be ingenious because the free lunch of high yield is no longer the case,” says Omotunde. He suggests that a viable approach to long-term profitability, which some banks are already exploring, is to find niche sectors of the economy to lend to. However, yields on government securities may yet remain attractive as the central bank seeks to prevent capital flight ahead of national elections in 2019.
Having cut back on lending during the recession, banks marginally increased the quantum of loans issued to the private sector in 2017 by 3.5%, from N61trn ($170bn) to N63trn according to data from the National Bureau of Statistics. But in its annual outlook for the sector, ratings agency Moody’s says the real value of the loans declined by 15.4% in 2017 as a result of the devaluation of the currency. The agency forecasts an aggregate increase in lending of up to 10% in 2018.
Non-performing loans (NPLs) remain a concern. The industry NPL ratio is forecast to rise beyond the 15% of total industry loans that the central bank reported earlier this year. Moody’s estimates a rise to around 18% at year end. Consequently, banks have to cover for the increase in troubled loans. Aside from this, new international financial reporting standards that came into force in January require the banks to increase provisioning. IFRS 9, as the standard is known, is expected to result in a downward adjustment in the value of shareholder capital.
Rahul Shah, head of financial equity research at Exotix Capital, explains that the underlying idea behind the standard is to help improve credit risk management: “A number of banks may need to set aside substantially higher volumes of provisions [as a result of IFRS 9], but we have seen central banks elsewhere allow for a transition period to ease the financial burden and to prevent negative unintended consequences, such as a sharp reduction in lending appetite at the banks. The CBN may choose to adopt a similar approach,” says Shah. As such, experts generally hold the view that the combined effect of the uptick in NPLs and the introduction of the new standard will lead to a moderate reduction in capital held by the banks, but not to an extent that will give any cause for concern.
Nigeria’s economy is still highly dependent on oil prices, lending risk to banks’ loans to the sector –Michael Kamber/The New York Times/REA
In a pre-emptive move to further strengthen banks’ capital buffers, the central bank issued updated guidelines on dividend payments in January, ahead of the release of full-year results for 2017. It prescribed new criteria which the banks must meet before they would be allowed to pay out returns. This aims to ensure that banks with relatively high NPL ratios will reinvest most of their profits. With the release of the full-year results for 2017 and publication of the NPL numbers beginning in April, most of the top banks, except First Bank of Nigeria (#23), faced no restrictions on dividend payments. Others such as Ecobank Nigeria (#60), Diamond Bank (#63, see profile) and First City Monument Bank (#85) were either precluded from paying dividends or allowed to pay with restrictions, due to their NPL and capital adequacy ratios (CAR) not meeting the criteria.
Individually, the country’s banks hold sufficient capital in excess of the capital requirements. Although the central bank estimated that the average baseline CAR for the industry was 11.5% in February, most banks in their full-year results reported a CAR above 15%, which is the threshold set for systemically important banks.
Cyber security tax
Improving income from fees on transactions and commissions, and particularly those from the use of digital channels, remains a key focus for the banks as they seek to recover their investments in information technology. The 2017 data for 13 banks listed on the stock exchange showed that they increased receipts from fees and commissions by 11%, from N592bn to N656bn. But, as the banks seek to grow income from digital channels, they will need to contend with a new levy of 0.005% on electronic transactions for the government’s national cyber security fund, which the central bank introduced in July. It is expected that the banks will pass on the cost to customers.
Digital transformation remains a key priority for the banks as they seek to capitalise on the promise of efficiency that technology offers. United Bank for Africa (#30) and Diamond Bank unveiled artificial intelligence assistants earlier in the year to help customers to carry out online transactions, while Sterling Bank launched a loan service called Specta, which it claims assesses loan applications and disburses approved loans within five minutes (see page 44).
As the gap between the six largest banks and the rest of the pack widens, it remains to be seen if there will be any form of merger and acquisition activity. Two banks – Unity Bank (#147) and Skye Bank – have been in some distress and in need of capital injections. The former has been involved in discussions with investors to secure capital, but nothing has materialised yet. The latter, which fell off our rankings this year, has received a new two-year mandate for the replacement board of directors appointed by the regulator in 2016.
From the September 2018 print edition
Photo: Nigeria’s economy is still highly dependent on oil prices, lending risk to banks’ loans to the sector
Credits: Michael Kamber/The New York Times/REA