What will shape Q3’23 earnings for banks?

The banking sector is set for a robust profit growth in the third quarter of 2023, driven by higher interest income, non-interest revenue, and FX revaluation gains. Analysts are optimistic about the performance of banks in the second half of the year, with expectations of continued strong core banking growth and an uptick in non-interest revenue. Joshua Odebisi, Senior Research Analyst at Rand Merchant Bank Nigeria, highlighted these trends in a recent interview on CNBC Africa. In the first half of the year, banks, especially tier 1 banks, delivered stellar results, largely attributed to FX revaluation gains. Odebisi acknowledged the significance of FX gains but also emphasized other key factors such as cost-cutting measures, non-interest income, and loan book growth. Looking ahead to the second half of the year, high interest rates are expected to support core banking growth, while non-interest revenue is projected to remain robust. Additionally, the recent increase in the official rate of the dollar suggests that banks may still realize FX revaluation gains, albeit at slightly lower levels than in the first half of the year. One of the critical aspects Odebisi discussed was the composition of banks' loan books. Traditionally skewed towards the oil and gas sector, with some exposure to manufacturing and agriculture, banks are facing capital pressure due to loan growth from FX revaluation gains. This could lead to a need for additional capital raises in the future, potentially impacting the banks' total capital adequacy. Electronic transaction channels have also been a focus for banks, aiming to enhance customer touchpoints and digital offerings. While there has been increased activity in electronic transactions, challenges remain, including reliability issues that have affected customer confidence. The competition from fintech firms, particularly appealing to younger demographics, presents a further obstacle for traditional banks, highlighting the need for continued innovation and improvement in digital services. Despite these challenges, Odebisi noted that tier 1 banks have historically catered more to institutional clients and high-net-worth individuals, rather than retail customers. However, the emergence of fintech companies targeting younger, tech-savvy consumers poses a long-term threat to traditional banks' market share. As the younger generation grows in purchasing power, banks may need to adapt their strategies to remain competitive in the evolving landscape. Regarding the regulatory environment, Odebisi highlighted a transitional period due to management changes at the Central Bank of Nigeria (CBN) and recent policy shifts. He emphasized the need for stability and price control to create a more predictable regulatory environment for banks. Overall, the outlook for the banking sector in the third quarter of 2023 appears positive, with continued focus on core banking growth, digital innovation, and regulatory adaptation.