Nigeria's banking sector maintains stability and growth

Despite the challenges to Nigeria’s economy, many of the country’s banks enjoyed healthy revenue and asset growth in 2016. Asset quality issues continue to hinder the sector, but banks have found avenues outside of lending activities to expand their balance sheets.

One area of growth stemmed from the devaluation of the naira in 2016. According to the IMF, 45% of loans held by banks are in a foreign currency. Upon devaluation, the book value of these loans in naira terms grew instantly. “There is no underlying risky asset growth. So any growth that you are seeing in the banking sector is mainly coming from foreign exchange (forex) translation,” Olubunmi Asaolu, head of equity research at FBN Capital, told OBG. “The underlying growth is pretty much flat. The growth in earnings is coming from non-funded income. So if they can’t grow their loans, they will simply invest in government bonds and Treasury bills. That is leading to record revenues for many established Tier-1 banks, in particular.”

Given the reluctance by local banks to take on additional risk in this environment, lending to the private sector has slowed considerably. Naira devaluation provided a one-off boost to the value of existing assets, but material growth in forex or naira lending is not expected in 2017. The purchase of government securities is providing one of the few significant sources of actual revenue growth in the sector.

Indicators

There are 27 banks operating in Nigeria, a figure that has remained stable since a 2004 wave of consolidation reduced the number from 89 to 25. Of these institutions, there are 22 commercial banks, four merchant banks and one non-interest bank. As of December 2016 there were 5570 bank branches, an increase on the 2015 figure of 5470.

According to recent Central Bank of Nigeria (CBN) data, total assets for commercial and non-interest banks grew by 12.4% in 2016, reaching N31.7trn ($112bn) by the year’s end. This followed 2.5% asset growth in 2015 and a 13.1% increase in 2014. Growth in merchant bank assets was much more dramatic, up 129% in 2016 at N447.6bn ($1.6bn). This growth was supported in part by substantial increases in Treasury and federal bond holdings, which grew from N74.8bn ($264.3m) to N203.1bn ($717.8m).

The percentage of liquid assets to total assets for the sector decreased slightly from 18.5% in 2015 to 16.3% in 2016. Likewise, the ratio of Tier-1 capital to risk-weighted assets fell from 17.1% to 12.9%.

The financial sector, excluding insurance services, contributed 2.6% to GDP in 2016 at 2010 constant prices, remaining largely steady on the 2.7% recorded in 2015. Total lending rose by 19.7% to N63.3trn ($233bn). The oil and gas industry accounted for 20.2% of lending in 2016, down from 25.2% in 2015. The proportion of credit to the manufacturing sector also decreased, falling from 14.1% to 13.1%. As expected, the government expanded its presence in commercial lending markets, accounting for 8.4% of lending in 2016, compared to 5.7% the previous year. Other notable recipients of credit in 2016 were oil and gas services (7.3%), trade (6.2%) and financial services (5.5%). Average prime lending rates at commercial banks rose slightly, ending 2016 at 17.1%, up from 16.9% a year earlier. The loanto-deposit ratio closed out the year at 80%, according to CBN data. Deposit interest rates were also slightly higher, increasing to 4.2% in the final quarter of 2016, up from the 2015 average of 3.6%.

Credit Growth

Although the volume of sovereign debt as a proportion of bank assets remains lower than in many other African markets – such as in Ghana, where it exceeds two-thirds – it is increasing rapidly in Nigeria, due to the fact that it provides an attractive source of reliable revenue. With the CBN primary rate remaining steady at 14%, private sector interest rates of as much as 30% are often not enough to fully cover the heightened risk when compared to the guaranteed returns banks can generate by lending to the federal government. In fact, the IMF noted that credit to the private sector, which was up 22% year-on-year (y-o-y) in December 2016, remained essentially unchanged once fluctuations in the exchange rate over the same period were taken into account.

Rates

While adequate private sector access to credit is a key factor supporting economic growth, the CBN is not expected to lower rates in the near term, particularly with inflation well above government targets. “The government will have to borrow, but right now most of it is being loaded on the domestic market, and this is crowding out the private sector,” Tolu Osinibi, executive director of FCMB Capital Markets, told OBG. “If there is a continued focus on significant domestic borrowing, the interest rate will not come down anytime soon, therefore it is safe to assume that commercial lending will remain as it is: barely existent.”

Excluding the increased book value of forex-denominated loans caused by the naira devaluation, the majority of bank earnings stemmed from interest on government securities. The high interest rates associated with the large supply of government securities make it difficult for small and medium-sized enterprises (SMEs) and other private sector players to gain the attention of banks. Augustine Onwunali, assistant manager of equity research at Financial Derivatives Company, told OBG, “First quarter 2017 earnings came from investment income, from investing in government securities. Loan income did not grow by much, which means banks are lending less to the private sector. In a country like Nigeria, where the economy should be largely driven by SMEs, they cannot get loans.”

Non-Performing Loans

Unsurprisingly, non-performing loans (NPLs) grew as the economy weakened in 2016. According to the CBN, NPLs accounted for 14% of total loans by the end of 2016, up from 11.7% in June 2016. This is a significant increase on 2011, a few years after the country’s domestic banking crisis, when NPLs accounted for roughly 5% of total loans. Banking industry officials have highlighted two sectors as the primary sources of current NPLs: oil and gas, and general commerce. Beyond the fall in oil prices and the economic recession, banks have also been affected by other forms of macroeconomic turbulence. One example is the shortage of US dollars, exemplified by telecoms operator Etisalat. The company was granted a $1.2bn loan facility from a consortium of Nigerian banks, including GTB ank, Access Bank and Fidelity Bank, with $235m of this denominated in dollars. However, the country’s restrictions on access to the currency – a situation which has led a number of airlines to suspend local operations – meant the operator was unable to meet scheduled loan repayment obligations for the dollar tranche in early 2017, prompting the CBN to step in to negotiate debt restructuring.

Credit Agencies

The rise in NPLs is largely seen as cyclical in nature, and a result of the country’s recession and increased debt burden, rather than other fundamental issues. This is in part due to the rise in credit transparency over the past nine years, with three credit agencies – XDS Credit, CR Services and CRC Credit Bureau – now covering borrowers. Since 2011 the CBN has mandated that banks check the records of at least two of the three agencies before making a credit decision, while smaller entities – such as microfinance institutions – must check at least one.

However, the credit bureaux are only able to tap into financial credit histories, with non-financial data sources like consumer debt largely non-existent. “One ongoing challenge that we face is in relation to the quality of data, and how much more credit information is out there that hasn’t come into the system,” Peggy Chukwuma-Nwosu, head of business development at CRC Credit Bureau, told OBG. “For the moment, financial institutions are mandated to provide that information to the credit bureaux. However, for companies in other sectors that are not regulated by the central bank, we have to continuously sell them on the value of bringing their information onto the database.”

Reforms

Two legislative developments in the National Assembly could help address these concerns. The first is the formal establishment of the National Collateral Registry (NCR), a database that tracks the various forms of collateral used for credit decisions, preventing the same collateral from being used to support multiple credit decisions. While the NCR has been in operation since 2016, the new legislation will improve its scope and authority. A second bill before Parliament would give companies and institutions outside the banking sector the legal standing to pursue credit disputes in the courts, which many believe will expand the potential supply of consumer credit and, in turn, increase the availability of information for credit bureaux. Qusim Salawudeen, business analyst at CRC Credit Bureau, told OBG, “At the moment some retailers are reluctant to offer goods on credit while there is no formal legal recourse if the person defaults. The passage of this bill will open the market to the adoption of credit services.”

Regulation

While monetary policy has been a priority for the CBN since early 2016, it has proven to be a comparatively proactive independent regulator over the past decade, moving quickly to stabilise the sector following the margin lending crisis that affected the country in 2008, and helping to improve a number of structural issues in the intervening years.

Central to the post-crisis restructuring was the CBN’s ring-fencing of deposit-taking institutions from other financial services businesses, such as investment banks and insurance companies. Barred from the universal banking model that characterised the post-2004 era, investors could either incorporate holding companies for these activities or sell off auxiliary activities. The CBN also segmented capital requirements according to four types of licences, offering different capital adequacy ratios (CARs) and prices depending on the category of bank: national commercial banks; banks operating internationally barred from recapitalising foreign subsidiaries from Nigeria; merchant banks barred from taking deposits; and specialised banks and regional banks, including sharia-compliant ones.

In 2015 the CBN tightened its capital requirements for banks deemed systemically important, by deciding to raise the CAR for systemically important banks (SIBs) to 16%, compared to 10% for non-SIBs. However, moves to increase the minimum CAR for SIBs were suspended in light of recent weaknesses in the economy.

In its 2017 Article IV consultation, the IMF noted that three Nigerian banks representing around 5% of total sector assets were significantly undercapitalised, with CARs below 8%. While the IMF declined to name the three banks in question, the CBN has been working with the institutions to successfully meet CAR guidelines, according to local media reports.

Revenue Stream

 A number of other changes have affected margins in the sector over the past 18 months. The commission on turnover (CoT), a withdrawal fee charged by banks, was finally phased out as of January 2016, in accordance with a 2013 CBN mandate. The CoT represented an important source of revenue for banks, and its elimination coincided with the move towards a Treasury Single Account system, which removed federal government funds from private sector bank accounts and consolidated them into a single, government-managed account. With the elimination of two important streams of revenue, the CBN instituted the current account maintenance (CAM) fee, which allows banks to charge a fee for holding customer accounts. While a maximum of 0.5% could be withdrawn from an account under the CoT, CAM withdrawals are capped at 0.1%.

Basel III regulatory updates are also in the pipeline, although the scheduled implementation of the framework has been affected by economic conditions. “I think Basel III was put on the back burner because of the challenges we are facing in the economy,” Olatunji Odesanya, CEO and managing director of Coronation Securities, told OBG. “However, this may be revisited as soon as the apex bank believes there is stability in the economy and an adequate availability of foreign exchange. Meanwhile, fiscal policies must also become more robust before this framework is implemented.”

Major Players

In an effort to strengthen the largest and most interconnected banks operating in the country, the CBN has implemented stricter standards for the country’s most important banks. The eight largest banks operating in Nigeria – First Bank of Nigeria, Zenith Bank, United Bank for Africa (UBA), Access Bank, GTB ank, Ecobank Nigeria, Diamond Bank and Skye Bank – have been classified as SIBs. Among the stricter standards for SIBs, Tier-2 capital may only account for 25% of qualifying capital, with Tier-1 capital accounting for the remaining 75%. The Tier-2 capital limit for other banks is 50%. Additionally, the minimum liquidity for SIBs stands at 35%, higher than the 30% required from other banks. Implementation of this rule was scheduled for July 2016, but was delayed indefinitely amid general weakness in the economy.

First Bank Of Nigeria

Established in 1894, First Bank is the largest bank in Nigeria in terms of total deposits and gross earnings. The bank also maintains a presence throughout West Africa, and has two European subsidiaries, one in London and another in Paris.

Total assets in 2016 were N4.7trn ($16.6bn), up from N4.2trn ($14.8bn) in 2015. Its CAR stood at 17.8% in 2016, against 17.1% in 2015, while its NPL ratio rose from 18.1% to 24.4% over the same period. Its liquidity ratio stood at 52.7% in 2016.

Zenith

Founded in 1990, Zenith now boasts over 500 domestic branches. The bank also has a presence in several West African countries, the UK, South Africa and China, amid further efforts to expand deeper into Europe and Asia. By the end of 2016 total assets were N4.7trn ($16.6bn), up from N4trn ($14.1bn) a year earlier, while its CAR rose from 21% to 23%. Zenith’s liquidity ratio at the end of 2016 was 59.6%, up from 51.4% in 2015, while its NPL ratio had risen from 2.2% to 3%.

UBA

Tracing its roots to the British French Bank, UBA was incorporated in February 1961, shortly after Nigeria gained its independence from the UK. Today, the bank has a presence across the continent.

Total assets grew to N3.5trn ($12.4bn) in 2016, a 27.3% increase on the 2015 figure of N2.8trn ($9.9bn). The bank’s CAR remained steady at 20%, and although the liquidity ratio dropped from 51% to 39% over 2016, it remained above the 35% minimum level to be implemented by the CBN. The bank posted an NPL ratio of 3.9%, up from 1.7% the previous year.

Access

As a leading commercial bank, Access has representative offices and subsidiaries in West Africa, Central Africa, China, the UAE and the UK. As of the end of 2016 the group’s total assets stood at N3.5trn ($12.4bn), against N2.6trn ($9.2bn) in 2015. Access’ liquidity ratio increased from 38% to 43.6% over the course of 2016, while its CAR also rose from 19.5% to 21.2%. Much like other large Nigerian lenders, Access’ NPL ratio edged up over the course of 2016, rising from 1.7% to end the year at 2.1%.

Gtbank

Based in Nigeria, GTB ank has subsidiaries across West Africa and a presence in London. Total assets for the group stood at N3.1trn ($11bn) at the end of 2016, an increase on the N2.5trn ($8.8bn) recorded in 2015. The CAR improved slightly from 18.1% to 19.8%, the liquidity ratio remained steady at 46.4%, while the NPL ratio rose from 3.2% to 3.6%.

Ecobank

Headquartered in Togo, Ecobank operates in 36 African countries, and its foothold in Nigeria was strengthened with the 2011 acquisition of Oceanic Bank. At year-end 2016 total assets for the Nigerian subsidiary were $6.2bn, a 33% drop from the $9.2bn recorded a year earlier. The bank’s CAR increased from 20.5% to 25.3%, while its liquidity ratio rose from 33.2% to 36.2%. Meanwhile, NPLs fell slightly over the same period, from 10.2% to 9.1%.

Diamond

Incorporated in 1990, Diamond Bank is a retail-focused institution with 317 branches across Nigeria, Benin, Côte d’Ivoire, Senegal and Togo. The company reported total assets of N2.1trn ($7.4bn) by the end of 2016, up from N1.8trn ($6.4bn) a year before. Its CAR decreased slightly throughout 2016 to stand at 15% at year’s end, while the bank’s NPL ratio rose from 6.9% to 9.5%. Liquidity, however, fell over the same period, from 52.8% to 42.3%.

Skye

Skye Bank has over 200 branches across Nigeria, along with a presence in other West African countries. As of September 2015, the date of the release of the bank’s most recent financial data, its total assets stood at N1.3trn ($4.6bn), up from N1.2trn ($4.2bn) at the end of 2014, while its CAR was 17.3%.

Acquisitions

While the years after the 2008 financial crisis saw a number of nationalisations, sales and acquisitions, recently market movements have been less infrequent. The most notable recent development was the N25bn ($88.4m) sale of Keystone Bank in March 2017, acquired by a consortium led by local investors Sigma Golf Nigeria and Riverbank Investment Resources. The sale of Keystone was seen as significant in the industry, as it was one of the last large banks held by the Asset Management Corporation of Nigeria, the state-owned so-called bad debt bank, which assumed control of Keystone in the wake of the banking crisis.

However, there may be other major moves throughout 2017 and 2018. FirstRand of South Africa has repeatedly expressed interest in acquiring a Nigerian bank – ideally one with a large branch network across the country – to help fund the operations of its subsidiary, Rand Merchant Bank, which is already present in Nigeria. FirstRand had previously sought a stake in the market through the purchase of Sterling Bank in 2011; however, negotiations failed to bring an agreement on a valuation. “Consolidation is going to happen at some point, maybe in 2018 or 2019, because even some banks that are perceived to be healthy still have CARs in the range of 15% to 17%. If they are still within this range or lower by the time Basel III kicks in, and NPLs still remain on their books, then the creation of additional risky assets to drive profitability may become a challenge,” Odesanya told OBG. “Furthermore, as the cost of deposits rises, and on the assumption that current rates may decline throughout 2017, interest margins may thin, and loan book growth will become a critical success factor and earnings driver in the coming years. As a result, there must be some form of consolidation among banks with weak CARs, or they must attract additional capital to support the business in terms of creating more risk assets.”

Microfinance

The CBN licensed 31 microfinance institutions (MFIs) in 2016, bringing the year-end total to 978. Many of these MFIs entered the market in the past decade, coinciding with the establishment of the CBN’s Microfinance Policy, Regulatory and Supervisory Framework in 2005. Total assets for the industry fell by 5.3% in 2016, ending the year at N341.7bn ($1.21bn), down on N361bn ($1.27bn) in 2015. The CBN attributed losses to increased provisioning of NPLs. By a number of measures, MFIs are succeeding in markets where the formal banking structure has failed to gain traction, with stakeholders telling OBG the sector is achieving NPL levels below 5%. Alexander Nnamdi Enyinnah, asset and liability analyst at the Grooming People for Better Livelihood Centre, a Lagos-based MFI, told OBG, “The structures we have in place have helped us over time. We rely on social collateral, which makes it possible to have people come together as a group, despite the fact that each has their own individual liability. That has gone a very long way in helping us to manage our loans.”

Mortgage

The number of primary mortgage banks (PMBs) remained unchanged in 2016, of 34, of which 10 were national PMBs and 24 state PMBs. Total assets in the mortgage industry remained steady, growing by 0.34% in 2016 to N383.7bn ($1.4bn). Like in many West African economies, Nigeria’s mortgage penetration rate is low, at 0.6%, according to World Bank data. The market has struggled with the recession. Regulators have reported that more than half (55%) of mortgage loans in Nigeria have been classified as non-performing, compared to 10% among non-mortgage bank loans – figures that have prompted the government to shore up the stability of lenders. The state-owned Federal Mortgage Bank has started offering 20-year loans to mortgage providers in order to obviate the need for lenders to seek funding through capital markets.

Financial Inclusion

Bringing a larger portion of the population into the formal banking system has long been a priority for the CBN, not only to improve access to credit and boost the robustness of the system, but to also reduce parallel market activity. The World Bank’s most recent financial inclusion index, released in 2014, found that 44% of Nigerian adults held a bank account at a formal institution. While this number is above the sub-Saharan African average of 34%, it is well below other regions across the globe, and a push to expand brick-and-mortar branches is central to plans aimed at boosting this figure. “Financial inclusion is one of the major planks of government policy,” Marcel Okeke, chief economist at Zenith Bank, told OBG. “There is a plan for every bank in terms of where it will open new branches. The banks and the central bank have mapped out a strategy so the headquarters of every local government has the presence of a bank or a community bank that is linked to a microfinance bank.”

Outlook

Despite a testing couple of years, there is a sense that the industry has turned a corner, and that conditions are set to improve. “NPL levels may be slightly worse in 2017, but it will not get to 2009 levels,” Tunde Abidoye, equity research analyst at FBN Capital, told OBG. However, there are still challenges facing the sector. In light of elevated CARs and the high NPL rate, there remains scope for consolidation. Olubunmi Asaolu, head of equity research at FBN Capital, told OBG, “I do not see lending improving materially, because the government is still borrowing heavily. Unless the yield on government securities falls significantly, there is no incentive for any bank to aggressively lend.”

There is also confidence within the sector that SIBs and larger banks are in a relatively healthy position to ride out the remaining turbulence. “We believe that Tier-1 banks will generally fare better than Tier-2 banks, especially with respect to market share,” Tunji Hamzat, coverage and corporate banking associate at FBN Merchant Bank, told OBG. “This is because Tier-1 banks remain better capitalised, have better asset quality and have better liquidity than their Tier-2 counterparts, and we expect this to continue throughout 2017.”