Nigeria: Banks rebounding

Now four years on from the 2008 banking crisis, Nigeria’s financial sector is continuing to reap the benefits of the reforms that followed, with rapid growth in profitability and a significant decline in bad debt.

The five biggest banks saw growth double this year. Their combined profits soared to $1.6bn, four times the $400m they achieved in 2005, according to Aigboje Aig-Imoukhuede, the CEO of Access Bank, the country’s fourth-largest lender by market value. “The Nigerian banking system is poised for a new era of competition,” said Aig-Imoukhuede, who was speaking at a conference on October 4, days after his bank reported that first-half net income more than trebled to N26.3bn ($165.09m) from N8.05bn ($50.53m), while revenue doubled to N108.7bn ($682.37m).

The top banks have been posting impressive growth thus far in 2012. In a September report on the sector, Lagos-based Cordros Capital noted that the 12 banks it surveyed – including the top five – all posted revenue growth of more than 20% in the first half of 2012.

The release of third-quarter results have also given investors encouraging news. For example, on October 15, the United Bank for Africa (UBA), the country’s fifth-largest bank by market value, announced in unaudited results that its gross earnings grew to N168.2bn ($1.05bn) in the third quarter, up 21.4% on N138.5bn ($869.44m) in the same quarter of 2011. Total assets rose 11.1% year-on-year to N1.95trn ($12.24bn) and profit before tax surged 376.25% to N44.86bn ($281.61bn).

The figures represent a turnaround after the prolonged effects of the 2008/09 crisis, when 10 banks accounting for 40% of the system were signalled out by the Central Bank of Nigeria (CBN) for auditing and were subsequently sold off, nationalised or recapitalised. The crash came after several years of rapid growth that were fuelled by “margin lending” – banks lending to investors who then used the cash to buy the banks’ shares – and other soft and suspect lending deals.

The clear-up is estimated to have cost $21.5bn, including bailouts, forced mergers, the sacking of leading banking figures and the purchase of $11bn in non-performing loans (NPLs) by the newly established Asset Management Corporation of Nigeria (AMCON). Lamido Sanusi, the governor of the CBN, said in July that AMCON had recovered N600bn ($3.8bn) from the bad debts it bought and that it hopes to recover N1trn ($6.4bn) by year’s end.

The measures to tackle the crisis, while very expensive, are widely regarded to have been successful. As an IMF report in July noted, “Financial soundness indicators point to continued improvements in the health of the banking system. NPLs have declined sharply following their purchase by [...] AMCON and credit has stopped declining.”

The reinforcements made to the system and to individual banks seem to have established a firm base for growth. Analysing the performance of the broader banking sector in the first half, Cordros Capital said that growth in both interest and non-interest income helped boost earnings, while asset quality improved and capital and liquidity positions remained solid, “despite heightened uncertainties in the external environment”. In the first half, banks continued to benefit from the higher pricing of earning assets through recent interest rate increases, as well as from the development of distribution channels such as mobile banking and e-banking to help increase business volumes.

The healthy performance of the country’s lenders has increased competition as well, particularly as the corporate segment becomes ever more saturated.

“Many of the banks are competing for the same corporate clients. This requires a focus on quality, as well as exploiting opportunities outside the balance sheet of the corporate client, such as banking the employees,” Sola David-Borha, the group chief executive of Stanbic IBTC, told OBG. David-Borha says that banks are increasingly looking to tap into the retail market, particularly as domestic demand for banking products rises along with purchasing power. Making a success of this, she asserts, will partly be dependent on innovation.

“Technology and IT are the way forward,” David-Borha said. “Electronics, phones, ATMs, and mobile money represent new ways of interacting with existing customers and new markets. These new channels allow us to expand the reach and services of branches.”

She added that the expansion of retail lending may lead to a rise in NPLs, and indeed, the rapid expansion of credit in Nigeria does also present risks. But NPL risk in the retail segment is factored into pricing. Furthermore, expansion into retail lending should help banks diversify their asset portfolios, reducing exposure to high risk-weighted corporate and low-rated government debt.

Given the recent past, and rather high rates of lending growth in an inflationary environment, Nigeria’s bankers, authorities and market-watchers would be wise to be cautious. But the changes wrought after the 2008/09 disasters, and the country’s economic outlook, bode well for the stronger players.

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