Nigeria: Banking lessons learned



A resurgence in Nigeria’s banking sector has seen assets and profits recover to beat pre-crisis levels as wide-sweeping financial reforms improve the country’s investment image, although there are concerns the renaissance is vulnerable to shocks in the eurozone.

In late January, a report by FSDH Securities, a capital markets services firm, revealed that the total value of the Nigerian banking industry’s assets had increased by 7.62% to N15.74trn ($96.6bn) by December 2011, against N14.63trn ($89.8bn) in December 2009. In the same period, customer deposits also improved by 5.42% to N10.99trn ($67.4bn).

Profits are also rising, with First Bank of Nigeria – one of the largest banks in the country – registering an increase to N49bn ($300.7m) before tax in the third quarter of 2011, up 20% from the same period year in 2010. Likewise, Zenith Bank announced last October that its pre-tax profit rose 28.04% to N50.13bn ($307.6m) in the nine months to September 2011, compared to N39.15bn ($240.2m) in the same period of 2010, while Stanbic IBTC Bank’s profits rose 10% in the first nine months of last year.

Analysts take the growth as a sign that banking reforms introduced by the government following the margin-lending crisis in 2009 are having an impact. Then, the Central Bank of Nigeria (CBN) had to pump $4bn into nine of the country’s 24 banks to keep them afloat.

As part of recovery efforts, which extended as far as enacting term limits for chief executives, the CBN required rescued lenders to recapitalise, with institutions that wanted to operate at home and internationally required to hold at least N50bn ($306.8m); domestic banks requiring N25bn ($153.4m); and regional banks, N10bn ($61.4m). However, by December 2011, all nine banks had agreed to recapitalisation deals.

The CBN last year also introduced a new regime modeled on ring-fencing that enforces banks to divest non-core banking business lines or create holding companies if they wish to offer other services to ensure that financial institutions do not use customer deposits to finance risky investments.

In a further confidence-building step, in mid-2010 the government created the Asset Management Corporation of Nigeria (AMCON) to stabilise the financial system by buying up non-performing loans and toxic debt from Nigerian banks. Since then, AMCON has bought approximately $9.5bn of non-performing loans, bundling them together and eventually releasing them on the debt market over three tranches.

The government’s prudent stance has attracted praise from external observers. In late December 2011, ratings agency Standard & Poor’s upgraded its outlook on the country’s credit rating to positive from stable. Just a few days later it revised its outlook on three Nigerian banks – First Bank, Zenith Bank and Guaranty Trust Bank – to positive from stable.

“The positive outlooks on the three banks largely reflect the banks’ stand-alone credit profiles and the outlook on the sovereign, and indicate at least a one-in-three likelihood of the banks being upgraded if the government’s reform initiatives progress and help support economic growth,” said the agency.

While the total investment of the government in rescuing the banking sector has been estimated at some N3trn ($18.4bn), the CBN has also taken steps to improve the broader economy such as introducing the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), which was aimed at increasing lending to agriculture from the current 2% of the total lending to 10% over seven years. Agriculture accounts for 40% of Nigeria’s GDP and provides 60% of employment.

The financial reforms have been a key pillar of President Goodluck Jonathan’s broader overhaul of the country’s economy, which has attracted outside praise and resulted in encouraging performance – growth in 2011 was has been estimated at 5.4% by the World Bank.

Charles Robertson, an analyst at Renaissance Capital, told London’s Financial Times that three key reform areas signalled benefits for long-term investors, including the reduction of Nigeria’s fuel subsidy, which “cuts the scope for corruption and allowing a redirection of funds”, and the government’s decision to abolish the Power Holding Company of Nigeria, “which had been a major factor preventing reform of the electricity generation sector”.

The third reform area was the Petroleum Investment Bill to be submitted to parliament by the end of the first quarter of 2012. “The PIB aims to unify all the necessary legislation in one bill, providing a clear framework for investment in the energy sector,” said Robertson.

However, while the outlook may look fairly rosy, the country still remains vulnerable to exogenous shocks, with some concerns that the eurozone debt crises may limit the ability of Nigerian banks to perform certain specialised financial transactions. Many Nigerian banks have the majority of their bank lines availed to them by European banks, reported local media.

Akin Dawodu, a treasurer at Citi Nigeria, confirmed to BusinessDay that some risk-averse Nigerian banks have started cutting back on credit exposure to European banks, and that “this makes sense”.

While the re-emergence of the banking sector has positive implications for the economy as a whole – seen in rising investor confidence – Abuja will need to ensure that the momentum in financial reform also benefits other investment concerns such as poverty, unemployment and graft.