Nigeria’s banking sector’s interest income growth is expected to remain dampened this year, due to the high level of system liquidity, and the lingering unorthodox policies of the Central Bank of Nigeria (CBN), analysts said.
Interest income is the amount paid to a company for lending its money to another entity. Nigeria’s banking sector in 2020 grappled with macroeconomic pressures including declining real gross domestic product (GDP) growth rates, rising inflation and unemployment rates, and fluctuating naira-to-dollar exchange rates caused by unstable oil prices.
These factors are combining to dampen consumption and investment and curtail government expenditure, with implications for banking activities.
The banking sector felt the impact of Covid-19 largely in two ways: slowing revenues and increasing loan loss provisions, according to McKinsey & Company, an American worldwide management consulting firm.
Revenues, such as fee income from the first half of the year, have declined by 6 percent compared with the third quarter of 2019.
Given the significant drive towards lending, Ayodeji Ebo, senior economist/head, research & strategy, Greenwich Merchant Bank, expects that the overall growth in loan volumes will compensate for lower asset yield keeping net interest margin on a positive side.
Moreover, he acknowledges the industry is in a low growth phase, and believes other unconventional strategies will be explored, which is analogous to the recent trend for a HoldCo structure.
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The banks that restructured to HoldCo in 2020 include, Access Bank Plc, Gtbank Plc, and Sterling Bank Plc.
Thirdly, for the non-interest income line, he envisages growth across the banks’ E-business income will be sustained, buttressed by its low base this year. Based on the promising signs emanating from the vaccine trials, impairment charges should roll back, as operating activities will gradually turn back to pre-pandemic levels, thus increasing profitability for the players.
For Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, The outlook for banking sector in 2021 will be shaped by a second wave of the pandemic increasing the vulnerability of banking credit to default risks and pushing up Non-Performing Loans (NPLs) once again.
Another source of vulnerability he said would be the International oil market. If crude oil price disappoints, this will jeopardize the Capital Adequacy Ratio (CAR) of many banks with significant exposure to the oil sector.
“It is expected that CBN’s policies will continue to be pro-growth in 2021. This will include sustaining the Loan-to-Deposit Ratio policy, as well as a low interest regime environment which for the banks would mean survival of the fittest,” he said.
The banking landscape is likely to witness significant change next year via restructuring. Already, a few of them are embracing the holding company structure.
Chances are that a number of banks in 2021 will recapitalize to meet up with the challenge of up scaling technology in response to the new normal of doing business occasioned by COVID-19. So, the capital market will likely witness some traction in primary market activities induced by the banking sector. It is also not unlikely to record some Mergers and Acquisitions next year especially involving tier-2 and tier-3 banks.
