Amidst factors like surging inflation and other economic elements, pan-African rating agency Agusto&Co has issued a cautionary note about the potential strain on operating expenses or operational costs for deposit money banks (DMBs) within the country.
In its recently unveiled 2023 Nigerian Banking Industry Report titled “The Nigerian Banking Industry – A Resilient Industry Navigating a Volatile Operating Terrain,” the agency highlighted that banks nationwide have observed an increase in available funds for creating risk assets. This growth has stemmed from a return to normalcy in terms of Cash Reserve Ratio (CRR) debits and improved foreign currency liquidity.
Agusto&Co pointed out that this development is set to be utilized for enhancing interest income and supplementary earnings through treasury functions. The report also underscored that considering the industry’s net foreign currency asset stance, the agency is of the view that the banking sector is well positioned to reap substantial benefits from the significant depreciation of the naira that resulted from the consolidation of various exchange windows, leading to notable gains in foreign exchange.
It said, “Overall, Agusto & Co. anticipates a 520 basis points increase in the return on equity to 26.8 per cent.However, the Industry is not entirely insulated from the vagaries of the Nigerian economy and we expect inflationary pressures to bloat operating expenses in the near term”.
It further said that the persistent naira devaluation and heightened credit risk environment have adversely impacted the Industry’s capitalisation position.
“Agusto & Co. expect these pressures to be accentuated by the ongoing macroeconomic reforms, particularly the naira devaluation. However, the ongoing recapitalisation exercise by some banks as well as the planned retention of profits will moderate the impact. Agusto & Co. notes the initiatives by banks with negative equity to resolve the challenge before December 2023. As a result, we expect the Industry’s capital adequacy ratio to improve to 19.2 per cent as at the end of 2023”, the report said.
As the competitive landscape is changing, the holding company structure is gaining more prominence with banks seeking to diversify into new businesses such as pension and asset management while responding to the disruption by FinTech companies. Based on this premise, Agusto&Co said that they expect more banks to go the HoldCo route as the competitive landscape changes. Similarly, environmental and social considerations are also expected to be more prominent in the near term.
“Overall, Agusto & Co.’s financial projection for the Nigerian banking industry is generally positive, however, we recognise that the Industry will face emerging risks from policy reforms and the ability to respond swiftly will determine the winners and the losers”, the firm said.
