The report said the FUGAZ banks also took the lion’s share of 79.3 per cent of industry profit before tax (PBT), in the same year.
The report said banks gained ₦2.6 trillion from FX trading and revaluation owing to favourable net FX positions. It also noted that “reformsˮ targeted at accelerating the cashless economy drove a sharp upturn in deposits, up 71.7 per cent to the highest levels in well over a decade and positioned banks to rake significant gains from monetary policy rate (MPR) hikes earlier in the year.
“As such, listed banks under our coverage recorded a combined 3.0x surge in earnings per share (EPS) to ₦11.5 from ₦3.7 in 2022,” the report said.
“Likewise, the financial institutions sector emerged as the second-fastest growing sector in 2023, growing at 28.9 per cent vs 17.2 per cent, with a GDP acceleration, unlike many other sectors that faced either growth slowdowns or declines.”
The report identified significant disparities in outcomes within the banking sector, which it says has critical implications for competitiveness as banks begin recapitalisation.
“This disparity is reflected in the uneven distribution of profits, with major banks (FUGAZ) accounting for 79.3 per cent of industry PBT and 80.8 per cent of industry PAT, up from 69.0 per cent and 71.1 per cent respectively in 2022.
According to the report, “While differences in scale economies and brand strength partially explain these outcomes, declining competitiveness could upend credit drive toward a trillion-dollar economy. Notably, Tier-2 banks tend to focus more on credit creation than Tier-1 banks. For example, the Loan-to-Deposit Ratio (LDR) for Tier-1 banks was 47.2 per cent while Tier-2 banks allocated 61.3 per cent of deposits to loans.
“Understandably, riskiness in the domestic economy has intensified over the past year, leading Tier-1 banks with substantial loan portfolios and a high non performing loans (NPL) ratio (4.4 per cent) to adopt a more conservative stance.”
The report says this emphasizes the need for policymakers, both in the financial and the public sectors to synchronize efforts towards derisking the real sector so banks can adequately fund the trillion-dollar economy ambition, having adequately recapitalised. “That said, the banking industry outlook remains broadly positive albeit as we anticipate continued EPS expansion buoyed by cost efficiency of industry players, attractive yield environment, and optimisation of the industry’s robust balance sheet.”
The analysts at Afrinvest noted that the reforms initiated in 2023, following the commencement of a new political cycle and key changes to core economic management teams, promised to steer the economy back on track – but not without significant pains.
According to them, “The overdue-but-poorly-implemented policy decisions to remove energy subsidies and overhaul the exchange rate management system, among others, resulted in immediate price and currency volatilities.
“These, along with sharp interest rate hikes in H2, toughed head-winds for businesses operating in an economy without adequate infrastructure support, rife with insecurity, and in dire need of sector-specific policy rework.
“Expectedly, real sector players suffered historic underperformance as firms booked significant losses owing to FX and interest rate pressure, as well as pressure on sales.”
The report also said that while banking recapitalisation is instrumental to economic growth and development, it is necessary to prioritise robust yet market-supportive regulations.
“This ensures that as banks increase their capital and expand their assets, these resources are deployed responsibly,” it said, adding, “Furthermore, the banking industry must uphold its independence while aligning with fiscal objectives such as the trillion-dollar ambition. The misstep of the Indonesian banking regulator involved loosening rules to facilitate growth-oriented fiscal agenda.
“Away from these, the Nigerian banking environment appears to be conservative towards credit creation because of potent economic and credit risks stemming from price & currency instability, tough business operating environment, weak infrastructure base, and insecurity.
“It is therefore important for the government and CBN to work together to reduce these risks to encourage lending to aid the timely attainment of the $1.0 trillion economy target.”
On how banking recapitalisation can support infrastructure expansion, being the bedrock of nation-building and economic development, the Afrinvest report quoting the National Integrated Infrastructure Master Plan (NIIMP), which said that a total infrastructure investment of $2.3 trillion is required over the period of 23 years to bridge the infrastructure gap, the analysts say, “We expect bank recapitalisation to be instrumental to boosting infrastructure development in Nigeria. By increasing banks’ lending capacity, recapitalisation should mirror the positive effects seen in South Korea after its financial crisis.
“This, along with a more stable financial system, would attract investment in infrastructure projects. Equally important, we emphasize the need for additional government reforms to strengthen regulations and mitigate economic risks, creating a more attractive environment for infrastructure investment.”