Banking sector shows sustained growth on strong capital, improved asset quality

The Central Bank of Nigeria’s economic report for May 2024 confirmed the sustained growth and stability of the country’s banking sector, showcasing key indicators that suggest a resilient financial system

According to the report, Financial Soundness Indicators (FSIs) remained well within regulatory benchmarks, highlighting the banking industry’s continued ability to withstand shocks and support economic activities.

A major highlight from the report is the notable improvement in the banking sector’s Capital Adequacy Ratio (CAR), which rose to 12.17 percent in May 2024, surpassing the 10 percent regulatory benchmark for banks with national and regional licenses. This increase marks an improvement from the previous period’s CAR of 10.81 percent. The higher CAR is seen as a direct result of banks’ proactive strategies to bolster their liquidity in anticipation of new capital requirements set by the Central Bank of Nigeria (CBN).

A statement by Bala Moh’d Bello, a member of the CBN’s Monetary Policy Committee (MPC), emphasised the importance of the banking sector’s soundness in driving economic activities. “The banking industry’s soundness indicators remain strong, with huge potential to support economic activities. The stress test results show that the industry’s solvency and liquidity positions can withstand mild to moderate shocks in the short to medium term,” he said during MPC meeting in September 2024, underscoring the sector’s capacity to navigate potential economic challenges.

The industry’s asset quality also showed significant improvement. The ratio of non-performing loans (NPLs) to total loans declined to 3.81 percent in May 2024, down from 4.79 percent in April. This decrease brought the NPL ratio well below the regulatory threshold of 5 percent, signalling an improvement in loan repayments and effective regulatory oversight. The decline in NPLs reflects the success of ongoing efforts to stabilise credit risk in the banking sector, even as banks continue to navigate a challenging economic environment.

Further strengthening the overall picture, the liquidity ratio of the banking industry stood at 43.54 percent in May, an increase from 40.60 percentin the previous month and well above the regulatory minimum of 30 percent. This high liquidity ratio illustrates the banking sector’s capacity to meet its financial obligations without significant strain, an important indicator of stability in a period of tight monetary conditions.

The report also highlights increased liquidity in the banking system, driven by inflows from the Federation Account Allocation Committee (FAAC) disbursements and the maturity of Nigerian Treasury Bills (NTBs) and CBN bills. As a result, the average net industry balance grew to N1.21 trillion, up from N1.12 trillion in April. Additionally, the Central Bank’s monetary operations, including the standing deposit facility (SDF) and standing lending facility (SLF), saw significant shifts. The SDF window recorded a sharp increase in transactions, reaching N0.96 trillion in May 2024, compared to N0.47 trillion in the previous month. In contrast, the SLF window saw a decline, with transaction values dropping to N10.95 trillion from N11.90 trillion.

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The Central Bank’s open market operations (OMOs) during the review period also played a critical role in managing liquidity. The total amount offered, subscribed, and allotted in OMOs were N1.5 trillion, N1.95 trillion, and N1.92 trillion, respectively. The auction stop rates increased slightly to 20.74 percent (±1.75%) in May 2024, compared to 20.25 percent (±1.25%) the previous month. This rise in rates was attributed to liquidity conditions and broader economic sentiments.

In addition to robust capital and liquidity metrics, the CBN’s tight monetary policy stance continued to influence the broader money market. Short-term interest rates rose, contributing to the overall stability of monetary aggregates. The expansion in the money supply was primarily driven by growth in net foreign assets and net domestic assets, alongside the continued depreciation of the currency.

The Nigerian capital market also performed positively, with a bullish trend driven by favorable corporate earnings results for Q1 2024. This reflected a broader confidence in the stability of the financial system, as investors looked for opportunities amid global and domestic uncertainties.

Looking forward, Bandele A.G. Amoo, another member of the MPC, stressed the importance of continued vigilance and strategic capital management. In a statement during the MPC’s September 2024 meeting, he noted, “The Nigerian financial system remains solid and resilient, gaining strength from broader macroeconomic stability. Its well-capitalised and unclogged balance sheet reflects a higher risk absorption capacity, with specialised banks also showing improvements.” Amoo further highlighted that the banking sector’s liquidity remained robust, with a high liquidity ratio of 52.9 percent in September, indicating that banks are well-positioned to weather potential shocks.

The Nigerian banking sector’s positive performance is also evident in its stable Capital Adequacy Ratio, which stood at 12.08 percent in September 2024, showing minimal fluctuations in its risk-absorbing capacity. Meanwhile, the NPL ratio remained low at 4.2 percent, further confirming the sector’s ability to effectively manage credit risk.

The Central Bank’s economic report underscores the resilience of Nigeria’s banking sector, which has not only met regulatory standards but also positioned itself to support the country’s economic growth in the face of external and internal challenges. As Bala Moh’d Bello aptly put it, the sector’s strength and liquidity offer significant potential to contribute to Nigeria’s long-term economic stability and development. However, continued efforts to build capital buffers remain essential as monetary policies tighten.