The incoming Central Bank (CBN) governor, Godwin Emefiele, is hugely being consider to be a positive factor for Nigerian banks, although analysts believe that lenders may need to rein in spiralling costs to improve profitability.
Emefiele, 52, who will become head of the CBN on June 1, has a mandate to keep the inflation rate, which reached 7.9 percent in April, inside the 6 percent to 9 percent target band.
“Emefiele is a steady individual, who is always cautious, so expect slow deliberate decisions from him,” said Matthew Pirnie, Standard & Poor’s (S&P) senior analyst for Sub-Saharan Africa Financial Services Ratings. “He is a stabilising and positive force for the banks,” he said.
The new CBN governor will be taking the helms at a period when Nigerian lenders, while having relatively stronger balance sheets after the 2009 banking crises, are contending with reduced profitability on the back of higher reserve requirements, lower fees and increased competition.
Nigerian stocks have dropped 4.3 per cent year-to-date (May 23) as the heavyweight banking sector sold off on concerns over the impact of increased regulations on profitability.
The Nigerian Banking index is down 7.3 per cent year-to-date, led by declines in Zenith Bank (-14.56 per cent), First Bank (-14.72 percent), Skye (-24.32 percent), UBA (-19.10 percent), and Fidelity Bank (-22.68 percent).
Lenders are also increasingly getting exposed to dollar liabilities (Eurobonds) to match expected dollar-denominated loans to the power and oil and gas sectors, leaving them exposed to currency risk in event of a naira devaluation scenario, said Pirnie.
Emefiele said at his Senate confirmation hearing that devaluation of the naira would be “devastating” for the economy, although the level of Nigerian dollar reserves, down -16.6 percent year-to-date (May 22) to $37.3 billion, may provide a better indication of the CBN’s ability to defend the currency.
Banks don’t need to get over-leveraged to drive profitability as they can work on cost elements to increase returns, according to Pirnie.
“A bank like First Bank has a lot of cost optimisation levers they can pull to increase return on equity (ROE),” said Pirnie.
Guaranty Trust Bank’s (GTB) return on average equity (ROaE) of 29 percent was the highest among Nigerian lenders in 2013, although this trailed the average ROE for Ghanaian lenders of 33 percent as at the third quarter of 2013, according to a recent report by Ecobank research.
S&P’s universe of rated banks in Nigeria (Access, First Bank, Stanbic IBTC, GTB and Zenith Bank) would need to raise $1 billion in tier-one capital over the next 12 months, according to Pirnie.
Tier-one capital refers to a firm’s core equity capital, and is the measure of a bank’s financial strength based on the sum of its equity capital and disclosed reserves.
Nigerian banks had core capital reserves averaging about 18.1 percent of their risk-weighted assets at the end of 2012.
Banks with international operations are required by the CBN to meet a minimum CAR of 15 percent.
The size of Nigeria’s retail banking market has the potential to grow to about 10 million people in five years, rivalling South Africa, said Pirnie, adding that this growth would be influenced by new initiatives of biometrics, credit bureaus, a more efficient housing collateral mechanism and technology.
“There is a potential retail banking revolution coming,” said Pirnie. “Nigerian lenders are probably where Indonesian banks were five years ago.
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