Cordros: Banks’ gross earnings to remain resilient in FY’25

Nigeria's banking sector is expected to see resilient gross earnings in 2025, driven primarily by growth in funded income, according to Ope Oluwa, Research and Strategy Analyst at Cordros. The outlook for banks this year is brighter, with funded income set to fuel substantial earnings growth, while non-core income may face pressure due to the Central Bank of Nigeria's Net Open Position restrictions, limiting FX revaluation gains. Oluwa highlighted key drivers for funded income, including the high interest rate environment and higher yields on fixed income instruments and investment assets. The combination of these factors is expected to drive earnings growth across banks, offsetting the subdued performance in non-core income due to limitations in the FX space. Looking ahead at fixed income yields, Oluwa noted that the market anticipates yields to trend downwards in the second half of the year as interest rates are expected to decline. However, overall, yields are projected to remain elevated for longer periods despite potential fluctuations. Discussing non-core income, Oluwa emphasized that the stable FX rates in 2025 will reduce the likelihood of significant devaluations seen in previous years. As a result, banks may experience reduced FX gains due to restrictions on net open positions in FX assets imposed by the CBN. In terms of loan book growth, Oluwa mentioned the optimistic economic outlook and brighter projections for GDP growth, indicating potential for banks to deploy more capital in loans. The recent recapitalization exercise has led to banks having larger asset sizes, enabling them to extend more loans into the market. While banks are expected to prioritize traditional sectors initially, the potential for venturing into non-traditional sectors exists as the economy improves. Oluwa also touched upon the ongoing recapitalization process, noting that phases two and three are currently underway. Investor interest in the banking sector remains strong, with expectations of smooth private placements for major banks and tier twos. Oluwa expressed confidence in the sector's overall strength and identified tier one banks as likely candidates for leading positive performance in the banking industry. Despite challenges such as restrictions on non-core income and FX gains, Nigeria's banking sector is positioned for growth in 2025, supported by favorable market conditions and ongoing capitalization efforts.