Nigerian Banking Sector: Emerged Stronger Post-Crisis… Future Prospects – Ayodeji Ebo, MD, Afrinvest Securities Limited

Nigerian banking regulators, like most of their global counterparts, took away three key lessons from the 2008 global financial crisis: 1) big banks can and do fail, 2) markets are not always efficient and, 3) risk management and corporate governance structures of banks are as important to financial system stability as balance sheet size. The global crisis uncovered the weakness of Nigeria’s hitherto prevalent universal banking model which permitted the banks to set up subsidiaries involved in capital market related businesses. Drawing lessons from the challenges of past years, regulators have stepped up their game to address systemic vulnerabilities. The result is a much stronger industry with a well-capitalised market which survived Nigeria’s harshest economic climate in nearly two decades without neither liquidity crunch nor systemic failure.

 

Examining the Nigerian banking sector in terms of financial performance and profitability levels, laudable improvements have been recorded post-crisis era, particularly in the Tier-1 segment which has become an attractive investment opportunity to Foreign Portfolio Investors (FPIs). These solid performances have been recorded despite stringent prudential regulations from the Central Bank of Nigeria (CBN) and stiff competition amongst peers amidst unfavourable macroeconomic conditions. One of the recent policies from the CBN aimed at financial system stability is the check placed on dividend payment by banks with low level of capital adequacy and/or weak asset quality.

 

Investors have certainly rewarded banks for the improvement in fundamentals, with data showing that the sector has outperformed the benchmark twice in the last 4 years and is outperforming the market as at 6th August 2018. Comparing the Return on Equity (ROE) for the Nigerian banking sector – at 15.9% – to average ROE for Emerging and Frontier markets’ banks – at 17.9% (selecting an average of Egypt, South Africa, Morocco and Kenya) – the Nigerian banking sector compares favourably. Shining the spotlight on Nigerian Tier-1 Banks (GUARANTY – 32.6% and ZENITH -26.4%), this performance shows solid corporate profitability given that that other banks – Skye Bank, Unity Bank, Wema Bank, etc. – dragged overall sector performance down.

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