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Agusto & Co. Forecasts 16.5% Growth in Nigerian Banking Industry’s Loan Portfolio

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Agusto & Co. Limited, the pan-African credit rating agency and the foremost business information provider has released its 2022 Nigerian Banking Industry Report.

The 2022 edition of the annual report provides a comprehensive review of Nigeria’s banking industry and the near-term expectation for the Industry.

Agusto & Co. notes positively the resilience shown by the Nigerian banking industry in FY 2021, as the Industry’s loan portfolio grew by 21% despite the weak economy and regulatory constraints.

Notwithstanding the prevailing global supply constraints, the Russian-Ukraine crisis and insecurity challenges that continue to hamper food and crude oil production in Nigeria, we anticipate a 16.5% year-on-year loan growth in 2022 as more banks now have a better understanding of the macroeconomic headwinds.

Traditional sectors such as oil and gas, manufacturing, general commerce and agriculture sectors are expected to drive the loan growth given the backward integration initiatives of obligors, the intervention activities of the CBN and the import-dependence nature of the Nigerian economy.

While the arbitrary cash reserve deductions and foreign exchange illiquidity would remain limitations to the growth of the Industry’s loan portfolio, Agusto & Co notes that more banks are now favourably disposed to accessing the differentiated cash reserve requirement (DCRR) window to reduce the value of sterile restricted funds with the CBN.

In the near term, Agusto & Co believes the Industry’s asset quality will remain acceptable, with the impaired loan ratio hovering around 6% as at 31 December 2022.

In its view, a proactive tightening of controls around loan origination and intensified loan monitoring will moderate the impact of the tough operating climate on the loan portfolio.

Nigeria’s banking industry remains well capitalised relative to the business risks undertaken and should remain so in the near term.

In preparation for the full implementation of Basel III and based on the scheduled growth plans, Agusto & Co expects an increased appetite for perpetual bond issuances which qualify as additional tier 1 capital.

“We also believe that some banks will raise common equity tier 1 capital that will keep the Industry’s capital adequacy ratio above 17%,” the ratings agency said.

In FY 2022, Agusto & Co projects a decline in the Industry’s net interest spread as the prevailing low yields on government securities, which dominate the Industry’s investment securities, will moderate the impact of the uptick in interest rates.

“However, we anticipate an increase in the net earnings driven largely by higher trading income and electronic banking fees. Nevertheless, we note that the forthcoming elections and growing budget deficit have forced the FGN to modify several extant tax legislations which will moderate the banking industry’s profits,” it said.

Overall, Agusto & Co expects the Industry’s pre-tax return on average equity to increase to 23% (FY 2021: 20.6%) in FY 2022.

“Our financial prospects for Industry are largely stable in the near term. We adjudge the Industry as resilient and the current trend of banks adopting the holding company structure to diversify into other financial services segments while exercising control over subsidiaries should support the Industry’s profitability. The African Continental Free Trade Area (AfCFTA) is also another vital prospect for Nigerian banks given that financial institutions with a strong capital base and efficient network across the continent are essential for the full implementation of AfCFTA,” it said.

Overall, Agusto & Co believes the banking industry’s performance will remain moderate in the short to medium term and on this basis, its outlook for the Industry is stable.

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