BMI Research, a member of the Fitch group, has forecast positive outlook for the Nigerian banking industry going into 2018. It however, has concerns for smaller banks on growing non-performing loans (NPL).
In a recent Nigeria Commercial Banking Report, its analysts say they hold a positive view on the industry despite concerns raised in the media that the Nigerian banking sector is looking close to a repeat of the 2009 banking crisis, which saw non-performing loans top 33 percent.
“The outlook for the Nigerian banking sector is fairly positive almost mid-way through 2017, and while we acknowledge risks, we expect the systemically important top five banks, which together account for over half of total banking sector assets, are financially sound and will remain so through the course of 2018,” the analysts noted.
They say their positive view is premised on rising oil receipts and greater liquidity in the economy following the introduction of a new, tradeable, exchange rate in April. They, therefore, see improvement in the economy and the banking sector.
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The report however notes that there are still risks in the Nigerian banking sector following the tumultuous two years the economy has undergone, not least from NPLs. These had climbed to 14% in December 2016, according to the CBN.
“We do not expect that they will rise significantly higher than this, given the improvement in the economy this year, anticipating a level of around 16% before they begin to fall,” adding the picture is mixed between different banks, with some of the smaller and mid-tier banks having higher levels than the more sound top five where NPLs are as low as three percent.
While expressing concerns over smaller banks, where capital adequacy ratios (CARs) are being tested, especially when rising non-performing loans (NPLs) are taken into account, they averred that with rising oil prices and production, and diminishing liquidity constraints, saying that they are confident the Nigerian banking sector will remain stable.
“We are positive towards the growth prospects for Nigerian banks in 2017 and beyond, although profit growth is unlikely to match that seen in 2016, despite the ameliorating outlook for the Nigerian economy,” the pointed out, but see lower profits at full year 2017 compared to 2016 when most banks performed well.
Barring First Bank, Nigeria’s five largest banks saw sizeable gains in their profits in 2016 as they took advantage of a devaluation of the official naira exchange rate in June to implement profitable revaluations.
“In 2017, we no longer expect that there will be a devaluation to the official naira exchange rate, which will preclude the banks from deploying such tactics again,” the report said.
The report equally discountenanced the new exchange rate policy being implemented leading to a general uptick in the Nigerian economy, which will drive positive profit growth for most banks.
It said that though the Central Bank of Nigeria (CBN) has not implemented a free float of the naira, preferring to operate a host of different exchange rates and making dollars available for different sectors of the economy at different rates, it has introduced a new tradeable exchange rate window for investors and traders.
“We expect that this will boost economic activity in Nigeria by easing liquidity constraints present through 2016. Greater inflows of oil receipts, on the back of both higher prices and greater production, will also help in this regard. The greater liquidity in the economy will see increased activity in the banking sector.”