•Projects CAR to improve to 19%
By Chinwendu Obienyi
With soaring inflation among other economic factors, the operating expenses or cost of operations for deposit money banks (DMBs) in the country is expected to be stretched, pan-African rating agency, Agusto&Co has warned.
According to the agency’s 2023 Nigerian Banking Industry Report titled; The Nigerian Banking Industry – A Resilient Industry Navigating a Volatile Operating Terrain released yesterday, banks across the country have witnessed a rise in available funding for risk asset creation due to the reversal to normalcy with respect to Cash Reserve Ratio (CRR) debits and foreign currency illiquidity.
This, the agency said, would be exploited to boost interest income and ancillary earnings through the treasury function. The report also noted that given the industry’s net foreign currency asset position, Agusto & Co. believes the banking industry is also poised to benefit significantly from the massive naira depreciation that followed the move to harmonise the various exchange windows, reporting significant foreign exchange gains.
It said, “Overall, Agusto & Co. anticipates a 520 basis points increase in the return on equity to 26.8 per cent.However, the Industry is not entirely insulated from the vagaries of the Nigerian economy and we expect inflationary pressures to bloat operating expenses in the near term”.
It further said that the persistent naira devaluation and heightened credit risk environment have adversely impacted the Industry’s capitalisation position.
“Agusto & Co. expect these pressures to be accentuated by the ongoing macroeconomic reforms, particularly the naira devaluation. However, the ongoing recapitalisation exercise by some banks as well as the planned retention of profits will moderate the impact. Agusto & Co. notes the initiatives by banks with negative equity to resolve the challenge before December 2023. As a result, we expect the Industry’s capital adequacy ratio to improve to 19.2 per cent as at the end of 2023”, the report said.
As the competitive landscape is changing, the holding company structure is gaining more prominence with banks seeking to diversify into new businesses such as pension and asset management while responding to the disruption by FinTech companies. Based on this premise, Agusto&Co said that they expect more banks to go the HoldCo route as the competitive landscape changes. Similarly, environmental and social considerations are also expected to be more prominent in the near term.
“Overall, Agusto & Co.’s financial projection for the Nigerian banking industry is generally positive, however, we recognise that the Industry will face emerging risks from policy reforms and the ability to respond swiftly will determine the winners and the losers”, the firm said.