S&P Forecasts Nigerian Bank ROE to Normalise at 20% on Lower Rates

S&P Global Ratings has issued a “cautiously resilient” forecast for Nigeria’s banking sector in 2026.

While the agency expects a marginal decline in profitability, it emphasizes that the industry is entering a “normalization” phase.

S&P Global Ratings in a webinar held on 5 March, with the theme: Africa’s 2026 Credit Cycle Dynamics, noted that the era of massive foreign exchange windfalls and record-high interest margins is transitioning toward a model sustained by digital transaction volumes and enhanced capitalization.

As the March 31, 2026, recapitalization deadline approaches, the sector is shifting its focus from aggressive dividend payouts to building loss-absorption buffers against a backdrop of rising non-performing loans (NPLs).

Profitability Normalization: Beyond the Windfalls

S&P projects that the sector’s Return on Equity (ROE) will dip from an estimated 25% in 2025 to a range of 20%–23% in 2026.

• The Rate Trigger: As inflation continues to subside from its 2024–2025 peaks, the Central Bank is expected to accelerate interest rate reductions. This will compress Net Interest Margins (NIMs), which have been the primary earnings engine for two years.

• The Transaction Hedge: To offset lower interest income, banks are leaning into Non-Interest Income (NII). Fees and commissions from e-payments—which saw transaction values rise by 78% in 2024—are now becoming a core, recurring revenue pillar.

• Asset Levy Burden: Operating costs remain pressured by the AMCON levy (0.5% of assets), which S&P estimates accounts for 15%–20% of total bank operating expenses.

Asset Quality: The Forbearance Hangover

The “hidden” risks in bank balance sheets began to crystallize in late 2025 following the removal of regulatory forbearance on Oil and Gas loans.

• NPL Surge: S&P notes that NPL ratios climbed to 7.0% in 2025, breaching the 5% regulatory threshold. This was driven by the reclassification of “Stage 2” loans that had been protected since the COVID-19 pandemic.

• Hydrocarbon Concentration: Approximately one-third of the industry’s total loan book remains exposed to the oil and gas sector. While $80+ oil prices provide a buffer, these loans remain highly sensitive to any sudden drop in global energy demand.

• Currency Sensitivity: With 50% of loans denominated in foreign currency, any unexpected Naira volatility in 2026 could trigger immediate spikes in impairment charges for borrowers with unhedged FX revenues.

The Recapitalization Race: March 2026 Deadline

The Central Bank’s mandate to raise minimum paid-up capital (to ₦500bn for international banks) is fundamentally reshaping the sector’s capital structure.

• Capital Buffers: As of late February 2026, 20 out of 33 deposit money banks have met the new requirements. S&P expects the remaining top-tier banks to comply, largely through rights issues and private placements.

• Dividend Restraint: To preserve this new capital, many banks are expected to reduce dividend distributions in 2026. S&P views this “retention strategy” as positive for long-term creditworthiness, as it provides a thicker cushion against credit losses.

• M&A Momentum: For smaller lenders unable to meet the ₦200bn (national) or ₦50bn (regional) thresholds, S&P anticipates a wave of mergers and acquisitions to conclude by Q3 2026.

Get More of our proprietary news and analysis as MoneyCentral is now on WhatsApp Channels  Follow the MoneyCentral Nigeria channel on WhatsApp: Click here!