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Banks remain resilient in creating risky assets in 2021

Banks banned from reselling CBN dollars to each other

Nigerian banks remained resilient in creating risky assets in 2021 despite the weak macroeconomic and tight operating environment, according to Afrinvest West Africa, in its latest report on the banking sector.

Risk asset, as defined by Investopedia, generally refers to assets that have a significant degree of price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies.

According to the Afrinvest report, the banking sector delivered a 15.6 per cent and 6.8 per cent year/year growth in total assets and profit respectively in the first half (H1) of 2021 despite elevated Cash Reserve Ratio (CRR) debits and compulsory Loan to Deposit Ratio (LDR) levels.

“With the pandemic, the Nigerian banking sector vulnerability heightened which required swift policy responses from the CBN,” Victor Ndukauba, deputy managing director, said.

Consequently, the CBN rolled out stimulus packages to critical sectors with significant loan exposure, reduced interest rate on intervention facilities (from 9.0% to 5.0%), and granted banks the forbearance to restructure loan exposure. As a result, real Gross Domestic Product (GDP) growth in the financial institutions’ sector grew by 13.3 percent y/y.

Following a turbulent 2020 on the macro front, 2021 saw Nigerian banks recovering from their third economic crisis in just over a decade, Renaissance Capital, an emerging and frontier markets-focused investment bank, said.

This presented a difficult operating terrain for Nigerian banks to navigate, plagued by weak macro conditions, contracting margins, intensifying competition, and lingering asset quality concerns.

On the back of rapid digitisation trends witnessed in 2020 due to the global lockdown, RenCap said customer patterns have evolved, alongside the rise of nimble, innovative, and disruptive fintechs.

These fintechs have recalibrated the finance industry, towards being more focused on key themes such as low cost, easy access, and high speed. Nigerian banks have risen to the challenge, shedding branch heavy models and opting for strategic fintech partnerships, group-wide restructuring, and some fintech and Pension Fund Administrator (PFA) acquisitions.

In 2021, the report noted that major global central banks continued the accommodative monetary policy measures put in place to mitigate the devastating effect of the pandemic and propel their economies out of distress.

The CBN sustained its stimulus measures whilst keeping the Monetary Policy Rate (MPR) steady at 11.5 percent despite the high inflation rate.

Read also: Banks’ capital ratio to rise 17% on Basel 111 implementation

In addition, other policy parameters – the asymmetric corridor at +100/-700 basis points, CRR at 27.5 percent, and Liquidity Ratio (LR) at 30.0 percent were retained. This policy direction was expected to sustain the gradual recovery of the economy, as policy tightening (to rein in inflation) will increase the cost of capital, and by extension weigh on the recovery drive.

Amidst this dilemma, high inflation pressure shaped the CBN’s position on the yield environment. Consequently, the average T-bill’s rate rose from a record low of 3bps in December 2020 to 2.0 percent in January 2021, then rallied to 9.2 percent by the end of H1:2021.

Similarly, the 10-year government bond yield rose from 6.2 percent in December 2020 to 12.6 percent by the end of H1:2021. Despite this, real return remained in the negative territory amidst the high inflation rate.

Globally, the report stated that sustainable finance has attracted prominent interest within the global banking system as developed nations continue to advance broader Environmental, Social and Governance (ESG) plans to secure the world’s future. By lending to economic activities that boost sustainable development and rolling out incentive products targeted at addressing ESG opportunities and challenges, banks can take charge of the sustainable development drive. Furthermore, banks have begun to reallocate funding to sectors and companies that are driving good ESG practices. For instance, Goldman Sachs is set to mobilise US$750.0bn across investing, financing, and advisory activities by 2030 focused on sustainable finance subject matter such as climate change and inclusive growth.

Regulators around the world are quite focused on the unprecedented impact that risk of climate change may have on financial markets and stability, hence, many have proposed new frameworks with a broader set of expectations.

More than a year ago since Nigeria recorded her first confirmed case of COVID-19, the country has endured the economic hardship and disruption of livelihood that followed. While the world had little hope in the resilience of the dark continent, Nigeria managed to keep her head above the COVID-19 waters in the face of the first and second waves of the virus.

Through this, the increased level of hardship resulted in social disorder and economic agitations which led to the destruction of critical infrastructures (worth over US$800.0m) across the country while the economy plunged into its second recession in five years between the second quarter (Q2) and third quarter (Q3):2020. Although the Nigerian economy has clawed out of the recession (now with 3 successive quarters of growth), the populace remains at risk of the stinging fangs of COVID-19 especially with the discovery of the new Delta variant.