29.4 C
Sunday, April 2, 2023

Nigeria Banks Remain Underweight in Foreign Investors’ Portfolios

Must read

- Advertisement -
- Advertisement -

Nigerian banks reeling from a punitive regulatory environment stoked by the central bank’s stringent rules are no longer creating value for their shareholders and are largely being shunned by foreign investors.

That is because the return on equity-a preferred measure of profitability and efficiency- has been deteriorating in the past two years, raising concerns about the protracted investors’ apathy towards sector players shares amid abysmally poor valuations.

For instance, the average industry return on average equity (ROAE) for the biggest lenders reduced to 14.09 percent in September 2021 from 16.03 percent as at September 2020, according to MoneyCentral calculations.

Analysts have attributed poor valuations and underperformance of banks’ stock to the capital controls imposed by the regulator and the multiple foreign exchange regime that has strengthened investors’ lost appetite for equities.

That is largely responsible for capital flight as the country struggles to attract foreign direct investment needed to shore up external reserves in the face of an unpredictable macroeconomic environment.

“Nigeria remains a significant underweight in the equity portfolio of majority of our international clients and only those who have capital stuck in the country have been participating, but we have not seen much new capital being allocated to Nigeria given the CBN’s capital controls and exchange rate policy,” said analysts at Renaissance Capital in a recent note to client.

The combined net income of the largest and most liquid lenders was flat at N660 billion as at September 2021, according to data gathered by MoneyCentral.

Separating the wheat from the chaff shows Tier 1 lenders such as Zenith Guaranty Trust Holding Company or GTCO, United Bank for Africa (UBA), Access Bank, and FBH Holdings saw cumulative average ROAE fall to 17.24 percent in September 2021 from 21.37 percent the previous year.

Bank profitability is a key driver of financial strength, financial stability and resilient financial intermediation.

This is because banks’ ability to fend off shocks to the economy, their ability to raise capital depends largely on organic profit.

While asset quality has been improving due to the rebound in crude oil price that paved the way for debtors to meet their financial obligations combined with a large round of restructuring which was supported by the CBN, the unfriendly regulatory environment has remained a stumbling block to earnings growth.

As the regulator adamantly clings to a cash reserve ratio of 27.50 percent, sector players net interest margins continue to dwindle and that is on top of the low yield environment that they operate in.

Zenith Bank, the largest lender by market capitalisation, saw ROAE reduce to 18.58 percent in September 2021 from 24.36 percent as at September 2020.

GTCO’s ROAE reduced to 20.83 percent in the period under review from 29.79 percent the previous year.

FBN Holdings ROAE dipped to 7.17 percent in September 2021 from 11.98 percent the previous year.

Union Bank’s ROAE fell to 6.78 percent in September 2021 from 8.30 percent as at September 2020.

However, some banks buck trend as they are able to utilise shareholders’ resources in generating higher profit.

Access Bank’s ROAE increased to 21.30 percent in the period under review from 22.18 percent the previous year.

Sterling Bank’s ROAE rose to 12.90 percent in September 2021 from 8.97 percent as at September 2020.

Fidelity Bank’s ratio moved to 12.98 percent in September 2021 from 12.27 percent as at September 2020.

McKinsey and Company in a recent projected banking revenue to return to pre-crisis level between 2022 and 2024, depending on whether a rapid or slow recovery prevails, which means the industry faces a prolonged period of uncertainty.

Analysts are of the view that the only way banks can remain profitable amid a tough and unpredictable macroeconomic environment is to intensify their cost efficiency strategy that entails the deployment of the latest technology to reduce operating cost and bolster fees income from electronic channels.

Of course, they (lenders) face immense competition from financial technology (Fintech) firms who are unrelenting in cannibalizing sales of traditional financial institutions by using algorithms and codes to bring services to customers wherever they are without encumbrances.

Between 2014 and 2019, Nigeria’s bustling fintech scene raised more than $600 million in funding, attracting 25 percent ($122 million) of the $491.6 million raised by African tech startups in 2019 alone—second only to Kenya, which attracted $149 million, according to global body McKinsey and Company.

- Advertisement -
- Advertisement -

More articles


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

- Advertisement -

Latest article