Nigerian banks’ loan books rise by 27 per cent - Agusto

Agusto & Co, a leading rating agency, said the banking industry’s loan book rose by 27 per cent in the 2022 financial year, a feat spurred by increased activities at the differentiated cash reserve requirement (D-CRR) window, higher deposit base and naira devaluation.

In its 2023 report on the Nigerian banking industry, the agency noted that the banking industry had remained resilient despite regulatory headwinds that have constrained its performance in the last three years.

According to the agency, the banks have backed this growth with additional investment in credit risk management and capital raising exercises. The agency listed innovation and malleability of the banks as reflected in the transition to the financial holding company structure, upscale of banking licences, collaboration with financial technology companies (FinTechs) as well as domestic and international development finance institutions (DFIs) as measures that drive the growth.

However, the agency noted that some pressures in asset quality are expected, considering the lower consumer purchasing power and dwindling margins of some industries.

Nonetheless, it expressed optimism that the non-performing loan (NPL) ratio of the industry will remain below five per cent in its 2023 full-year performance with an increase of 520 basis points in the return on equity to 26.8 per cent as many banks leveraged their past experiences from recessions and the pandemic to navigate the cycle.

It also argued that industry is not entirely insulated from the vagaries of the economy as inflationary pressures are expected to bloat operating expenses in the near term.

The organisation believes that the several reforms implemented by the new government, including the removal of the petrol subsidy, exchange rate harmonisation, tax reforms and restoration of a methodological framework for calculating the cash reserve requirements (CRR) provide growth opportunities for the industry.

The agency also affirmed that the banking industry was poised to benefit significantly from the massive naira depreciation that followed the move to harmonise the various exchange windows that have enabled banks to record significant foreign exchange gains.

“We believe that many banks will take advantage of rising liquidity following the eradication of arbitrary CRR debits to grow the loan book, especially since the working capital needs of businesses continue to rise given the weakening domestic currency and other inflationary pressures. Agusto & Co expects performance by the Nigerian banking industry to be positive.

“Also, with the reversal to normalcy concerning CRR debits and foreign currency illiquidity, many banks have witnessed a rise in available funding for risk asset creation and we believe this would be exploited to boost interest income and ancillary earnings through the treasury function”, it stated.