AFRINVEST 2022 NIGERIAN BANKING SECTOR REPORT
Executive Summary (7 mins read)
Source: Afrinvest Research
GLOBAL ECONOMIC REVIEW & OUTLOOK
Since the publication of our 2021 Nigerian Banking Sector report – “Resilience Amidst Endemic and Pandemic Constraints”, the initial bullish projections for 2022 have been undermined by deteriorating fundamentals. More recently, the IMF noted that the World's real GDP contracted by 2.6% in the second quarter of 2022. The increasingly gloomy projections have been the upshot of mounting downside risks, further inhibiting a world economy yet to fully shrug off the impact of the pandemic.
Consequently, the IMF downgraded its global growth projections for the third consecutive time in 2022. In the October 2022 edition of the World Economic Outlook (WEO), the IMF projected that the world economy would grow by 3.2% in 2022 (2021: 6.0%) on the back of slower growth across both the Advanced Economies (AEs) and the Emerging and Developing Economies (EMDEs).
On the global trade front, the resurgence of the pandemic and other risk factors in 2022 has continued to weigh on the modest recovery recorded in global supply chain in the latter part of 2021. In 2021, the World Trade Organisation (WTO) reported that global trade value rebounded by c.25.0% to about $28.5tn. The resilience was due to the slowdown in infection rate, abating pandemic restrictions, increasing commodity prices, and a strong recovery in demand supported by economic stimulus packages.
In H1:2022, global trade was shaped by a mix of gloomy global growth outlook as well as the Russia-Ukraine war which pressured the commodities market. Commodity prices surged in the immediate aftermath of the invasion of Ukraine, particularly for commodities that Russia and Ukraine are key exporters. In addition, WTO stated in its report that 36 trade-related sanctions have been imposed on Russia (a large commodity exporter) since February. It is estimated that the recovery witnessed in world merchandise trade volume in 2021 (grew 9.8%) would slow down to 3.0% by end of 2022 (a downgrade of 1.7ppts from the previous forecast). We expect the ripple effect of this development to negatively impact the global financial system.
Chart 1: Mounting Downside Risk Dampens Global Growth Prospect
Source: IMF, Afrinvest Research
GLOBAL MONETARY POLICY REVIEW & OUTLOOK
Since the start of the year, inflation has been running hot globally. The Bloomberg world inflation index revealed that the average price level of goods and services rose by 57.0% in H1:2022. The surge in global price levels has been largely driven by disruptions on the supply side, notably, the resurgence of the COVID-19 lockdown in China and the negative spill-over effect of the Russia-Ukraine crisis on commodity markets.
Consequently, global Central Banks have embarked on an aggressive hawkish policy stance, with more than 60 increases in benchmark rates since February, in a bid to rein in inflation. Given a higher inflationary outlook, we project that a hawkish policy stance would persist globally over the next 12 months. Hence, we expect liquidity conditions to tighten, while the financial markets elongate their volatility.
DOMESTIC MACROECONOMIC REVIEW & OUTLOOK
In 2021, the Nigerian economy recovered markedly from the pandemic-induced strain of the prior year. Real GDP grew 3.4% (2020: -1.9%), beating our projection by 0.4ppts. The recovery was mainly driven by the expansion of activities in the non-oil sector (up 4.4%), while the oil sector remained in a recession. This growth momentum was sustained into 2022 albeit with a wider divergence between the oil and non-oil sectors. In H1:2022, real GDP expanded by 3.3%, driven by the non-oil sector which grew 5.4%. On the other hand, the oil sector contracted by 18.9% – the highest in comparable periods over the last decade.
Given the resilient H1:2022 performance and our expectation of sustained positive performance by key non-oil activity sectors in Q3 & Q4:2022, we have revised our FY:2022 baseline growth forecast upward by 40bps to 3.3% (IMF: 3.2%, FG: 4.2%). However, we maintain that growth momentum in the medium term would remain short of the level that can meaningfully lift the average well-being of the citizenry (Afrinvest estimate: minimum of 7.4% p.a.) due to persistent domestic and external headwinds.
Chart 2: Domestic Economy Buoyed by Performance of Non-oil Sector
Source: NBS, Afrinvest Research
On price level, domestic inflation rate has remained persistently high, averaging 14.3% in the last six years. In H1:2022, headline inflation averaged 16.7% (H1- 2021: 17.6%) owing to the impact of the Russia- Ukraine war on input prices, continued FX illiquidity, and structural challenges. Based on the World Bank estimate, the stinging fang of the elevated price level would drag 5.0m more Nigerians into extreme poverty (to reach 95.1m) by 2022 year-end.
Although the CBN has taken the lead in the efforts at curtailing the runaway inflation rate (e.g., the back-to-back hike of the MPR in May, July, and Sept. 2022 to 15.5%), we posit that only concerted fiscal and monetary policy efforts targeted at resolving insecurity challenges, optimising exchange rate management, fixing structural loopholes, and curbing reckless fiscal spending would resolve the high inflation quagmire.
On the fiscal policy front, the divergence between the share of FG's recurrent (debt & non-debt combined) and capital expenditure component has widened significantly in the last decade. Sadly, economic growth and fiscal stability have suffered the biggest impact from the worsened divergence. Before then, we observed a strong nexus between capital expenditure performance and growth in the decade to 2009. From 1999 to 2009, the divergence between the size of recurrent and capital expenditure averaged 48.5%.
Over this period, GDP growth (average: 7.0%) outpaced population growth (2.6% p.a.) significantly. This trend dovetailed into a strong labour market performance as the unemployment rate eased steadily to about 5.0% by 2009 year-end, according to NBS data. Also, GDP per capita surged by 279.9% to $1,891, while fiscal condition ended the decade strong as FG revenue to expenditure ratio printed at 76.5% (2009) with public debt stock (₦3.8tn) to GDP ratio of 7.5%. Sadly, this trend has completely reversed over the last decade. Not surprising, average growth momentum weakened by more than 50.0% in the last decade to 3.2%, with the 2015 to 2021 performance even more devastating at a meagre 1.1%.
Looking ahead, Nigeria is set for another cycle of leadership in 2023 as the tenure of President Muhammadu Buhari, 30 state governors, and over 1,000 legislatures draw to a close. At a time when there is daunting fiscal, monetary, and social challenges to surmount, Nigerians cannot afford to elect leaders who lack the competence, capacity, and creativity to find lasting solutions to the national quagmire. Even with a leadership that is willing to introduce the needed reforms, the present challenging environment would worsen before it can get better.
Hence, regardless of who the President is, Nigerians would need to brace for impact. Noteworthy, the political will of the incoming administration to implement tough reforms that would curtail major economic leakages such as the subsidy regime on PMS (which has gulped over ₦7.0tn since 2010) and ensure the proper channelling of scarce resources to critical sectors would be a refreshing start.
BANKING SECTOR REVIEW & OUTLOOK
During 2021, most of the world was marked by the removal of pandemic restrictions. On a global scale, the resumption of activities pushed GDP up by 5.9%. In Nigeria GDP recovered by 3.4% (2020: -1.9%) with financial services sector up by 10.5% (2020: 13.3%). This improvement is reflected in the banking sector's earnings and profitability which appreciated in 2021, driven by broader adoption of digital channels postlockdowns, a mild upswing in industry OPEX, and a slightly improved cost-to-income ratio.
Furthermore, deposit expansion and mild growth in impairment charges supported the steepest bottom-line growth in 4 years. As a result, aggregate gross earnings for the banks within Afrinvest's coverage grew 12.7% in 2021 to ₦5.6tn. Also, PBT and PAT increased by 25.6% and 22.0% compared to 0.3% and 4.2% in 2020, respectively.
In terms of asset creation, the loan books of the banks under our coverage grew 17.4% to ₦29.6tn in 2021, reflecting CBN's drive to widen credit penetration. This growth was helped by a surge in deposit base by 19.0% to ₦51.8tn on the back of an increase in economic activities throughout the year. Also, aggregate credit to the private sector rose 19.7% in 2021, faster than the 18.5% growth in 2020, according to CBN.
Impressively, average industry NPL ratio improved in 2021 to 4.1% from 4.8%, supported by the extension of regulatory forbearances by the CBN. Likewise, impairment charges on loans and other financial assets rose by 6.4% in 2021, an improvement over 85.7% previously. Meanwhile, CAR excluding UNITY and ETI slightly dipped to 21.1% in 2021 from 21.4% due to risk assets growth. Although CAR remains above regulatory threshold, we advocate industry recapitalizations to offset the impact of inflation and devaluation on capital whilst improving their global competitiveness.
Aside from the Commercial Banking space, we also assessed the Non-interest and Merchant Banking segment this year in order to establish trends and potential opportunities. For the Non-interest banking industry, its growth potential is underpinned by several factors, such as a large population with an interest in non-interest products; increasing government support for the industry; and the establishment of more Non-interest banks to exploit market opportunities. Hence, over the last 5 years the industry's net profit margin has improved from an average of 15.3% in Q4:2017 to 39.4% in Q4:2021 – reflecting better efficiency.
For Merchant Banking, the renaissance of the segment in Nigeria's financial industry began around 2010, after the 2008 Global Financial Crisis (GFC) collapsed the decade-old Universal Banking model. With this revision, many banks were reissued distinctive licenses to separate commercial and merchant banking functions. In our assessment of the Merchant Banking landscape, we observed a feeble capacity to execute their mandates of financing economic growth. This opinion is premised on the low ratio of Merchant banks' assets to total GDP at 0.8% compared to 40.5% for Commercial banks. While we found Nigerian Merchant banks to be efficient, they pale in comparison to the size of selected peers globally.
All in all, the performance of the banking sector failed to inspire a solid outing on the domestic bourse owing to sustained pressure from FPI outflows and portfolio realignment by domestic players in search for alpha. Unsurprisingly, the NGX Banking-10 index rose only 3.3% in 2021 (2020: 10.1%) relative to the broader market's 6.1% appreciation for the year.
Looking ahead, we highlight the areas of opportunities and key trends that would define the banking sector over the medium term:
Enhanced Digital Products: The potential for digital banking to improve cost efficiency, deepen market reach, appeal to large youthful demographics, and create new revenue lines would spur increased investment in the creation, acquisition, and strengthening of technology/fintech platforms.
Greater International Footprint: Amidst the stifling operating environment, Nigerian banks are exploring new growth opportunities beyond their borders. A case in point is UBA's venture into the Middle Eastern and Northern Africa (MENA) region with the commencement of its operation in the United Arab Emirates (UAE). Also, Fidelity Bank's plan to acquire Union Bank UK would open the lender to international opportunities. Whilst not immediate, we expect to see a gradual but steady expansion by lenders across international markets, especially in regions where there is a concentration and growth of Nigerian diaspora.
Capital Raise: Activity in the industry should intensify on the back of the expected expansion of products & platforms and in a bid to improve their market reach. Thus, there should be increased traction of banks on the capital market to finance these projects.
Consumer Credit Expansion: We expect to see the proliferation of consumer credit opportunities by banks to improve compliance with CBN's LDR and bolster profitability, especially through short-cycle loans like salary advances that have lower risks of deteriorating loan books.
Chart 3: Nigerian Banking Industry Snapshot
Source: CBN, Afrinvest Research
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