Bank growth and real sector credit expansion
Nigerian banks may be in the early stage of the next growth phase in the financial services sector which may last till the later part of the decade as a set of positive factors combine to improve financial inclusion in the economy. The earlier periods of growth for banks occurred in the mid-to-late 1980s when the financial sector started to account for a higher share of overall gross domestic product (GDP), and from mid-2004 to 2008 during and after the era of banking sector consolidation.
Some analysts say if Nigeria’s economy is transformed, with more lending to the real sector, a deeper level of financial inclusion, and a higher credit-to-GDP level, then all will benefit as a result, the consumer and borrower as well as the lender. The banks should then be able to command higher valuations leading to higher stock prices and equity capital. However, for this to materialise, the banks must begin to look at lending to real sector businesses as a profitable business model as opposed to their current fixation on fixed income assets.
The cumulative pretax earnings for the five Nigerian lenders (Zenith, Access, GTB, Sterling and ETI) who have released year end 2012 results rose 54.3 percent to N312.69 billion from N202.53 billion in the earlier period, in spite of the low level of risk asset creation.
Looking at the banks’ loan composition by sector exposure, lending to consumers stood at about 12 percent on average as at the third quarter of 2012. Home loans or mortgages were a negligible composition of loans for Nigerian banks. The reverse is the case for South African banks, which had home loans making up 32 percent of the total (according to SA Reserve Bank data) as at June 2012.
Credit extended by Nigerian banks to the private sector amounted to 37.2 percent of GDP at the end of 2011, compared to 77.54 percent in South Africa, according to World Bank data. The financial services sector contributed 3.45 percent to GDP in Nigeria for 2011, according to the National Bureau of Statistics (NBS), compared to 10.5 percent in South Africa, suggesting room for growth.
Analysts say retail product initiation coupled with strong leverage on IT will be critical in determining the sector’s growth going forward. Other catalysts for the next cycle of growth, according to analysts, include the resolution of the banking crises through AMCON (Asset Management Corporation of Nigeria), the successful privatisation of the power sector and a move towards stable inflation and, as a result, much lower interest rates.
Transnational Corp. of Nigeria Plc, one of the successful bid winners in the sale of PHCN assets, has outlined plans to raise N15 billion ($95 million) partly from banks for investment in its Ughelli Power Plant.
AMCON, a unique institution that combines buying non-performing loans (NPLs) with loan restructurings and recapitalising troubled financial institutions, has spent N5.6 trillion ($35.2 billion) to acquire non-performing loans.
Nigeria’s inflation rate which climbed to 9.5 percent in February, according to NBS data, accelerated from 9 percent in January, although it is still below the double-digits level.
Keeping inflation in single digits for a longer period of time will also be the basis for any meaningful credit expansion by banks in the long term. This is because making credit available will require banks to lend at real rates of return (at above the rate of inflation), which would make interest rates for loans unaffordable if double-digit inflation were to persist as has been the case in the past.