RENCAP: Risks to unfavourable valuation of Nigerian banks eased

In a recent report by Renaissance Capital, it has been highlighted that the risks facing Nigerian banks have eased significantly, leading to a more favorable valuation outlook. The report emphasizes that banks in Nigeria now possess stronger capital buffers to absorb losses from their forbearance exposures. One key aspect of the report is the expected capital raise of two billion dollars, which is projected to cover 50 percent of potential losses arising from forbearance exposures in the Nigerian banking system. Olumide Sole, the Head of Financial Institutions Research at Renaissance Capital Africa, provided insights on the report in an interview with CNBC Africa. The report notes that several factors contributed to the previously unfavorable valuation of Nigerian banks, including the issuance of additional shares, high-interest rates, windfall taxes, and forbearance exposures. These elements created a sense of uncertainty among investors, leading to lower bank valuations compared to counterparts in Sub-Saharan Africa. Currently, Nigerian banks are priced at an average of 0.4 price to book, significantly lower than peers in countries like Ghana, Kenya, and South Africa. One of the key concerns highlighted in the report is the gradual phasing out of forbearance measures by the Central Bank of Nigeria (CBN). Banks are still exposed to approximately $4 billion through these measures, prompting cautious observation of how the phase-out will impact bank performance. The gradual approach is expected to mitigate adverse effects on banks, allowing them to make provisions over time to absorb potential losses. Regarding e-banking revenue, the report pointed out that most Nigerian banks, except for Access Bank, recorded negative five-year compound annual growth rates in this segment. The emergence of fintech companies offering innovative services has created a competitive landscape for traditional banks. The report suggests that banks need to accelerate their response to competition and expand into new markets to enhance their e-banking revenue streams. In terms of market dynamics, the competition between banks and fintech firms is intensifying, with banks like Guarantee Trust Bank (GT) introducing initiatives to compete with fintechs on service fees and customer experience. Despite investments in IT infrastructure, banks face challenges in matching the free service delivery offered by fintech firms, leading to uncertainties in market share projection for the year. Looking ahead, the report anticipates a decline in interest rates and highlights the progress made by banks in raising capital. The analysis reveals that shareholder dilution concerns, stemming from the recapitalization efforts, have been partially addressed, with average dilution estimated at around 40%. Earnings per share have shown growth beyond the increase in the number of shares, mitigating fears of significant dilution. In conclusion, the Renaissance Capital report provides a positive outlook for Nigerian banks, emphasizing the resilience and adaptability of the sector amidst evolving market conditions. The ongoing recapitalization process and strategic responses to competitive pressures are expected to shape the future performance and valuation of Nigerian banks.