Are Nigerian banks resilient?

Nigeria's banking sector is facing a mixed bag of challenges in 2023, with moderate performance indicators amidst global and domestic economic headwinds. Analysts at Rand Merchant Bank Nigeria are projecting a 7 per cent profit growth year on year for the coverage banks in 2023, but obstacles such as naira scarcity, impairment, and a high-interest rate environment are raising questions about the sector's overall growth outlook. Joshua Odebisi, Senior Research Analyst at RMB Nigeria, provided insights into the key highlights of major banks' performance in the previous year and shed light on the potential hurdles and opportunities facing the industry. The recently released full-year 2022 financial results for major Nigerian banks, including Stanbic, Zenith, UBA, and ETI, revealed a narrative of earnings growth across the board. Gross earnings saw a boost, driven by solid interest income supported by rate hikes in the second half of the year. Despite increased minimum savings rates, interest expense remained manageable, leading to a positive net interest margin. Non-interest revenue painted a more nuanced picture, with strong trading income balancing out other factors. However, the unveiling of the Ghana Debt Exchange Program put a dent in the sector, catching many off-guard with its ramifications on risk management strategies. The exchange of Eurobonds for domestic debts and subsequent haircut served as a cautionary tale for banking institutions, prompting a reassessment of investment decisions and risk evaluation protocols. Looking ahead, the discussion shifted to loan book growth prospects for key players in 2023. The prevailing high-interest rate environment, coupled with recent rate hikes, is expected to dampen the industry's loan expansion trajectory, constraining growth in both traditional sectors and potential new frontiers. While oil and gas continue to dominate, other sectors like manufacturing and agriculture face risk aversion from banks, limiting lending appetite. Examining banks' financial intermediation role in supporting small businesses and the private sector, Odebisi noted a gap in SMEs' access to funding from larger institutions due to perceived risk levels, signaling a need for tailored financing solutions for this sector. Projections for 2023 weigh heavily on regulatory environments and interest rate dynamics, with potential rate hikes impacting net interest margins and core banking income. Amidst subdued loan growth expectations, increased non-interest revenue from digital banking channels is anticipated, as consumer transaction habits evolve in response to cash scarcity issues. Foreign exchange considerations remain a risk factor, contingent upon potential policy shifts and FX market developments. The tier-two banks, including Fidelity and Stanbic, are anticipated to maintain their aggressive strategies, leveraging platforms like agency banking to expand customer base and improve liquidity levels. Overall, the industry's resilience hinges on navigating macroeconomic uncertainties and adapting to evolving market conditions. As Nigeria's banking sector navigates the complexities of 2023, trade volumes are expected to surge, propelling non-interest revenue and shaping the industry's landscape. By embracing digital transformation and strategic risk management, banks can position themselves for sustainable growth and stability in a dynamic economic environment.