Nigerian banks may have begun to ride the next growth phase in the financial services sector, which may last till the latter part of the decade, as a set of positive factors combine to catalyse increased 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 the banking sector consolidation.
“If Nigeria’s economy is transformed, and there is more lending to the real sector, and a deeper level of financialisation, and credit-to-GDP becomes more important, then banks will be trading at a multiple of their current valuations,” Razia Khan, regional Head of Research Africa, at Standard Chartered Bank, said in a response to questions.
“It isn’t a short-term game at all. It’s about achieving long term, meaningful, lasting change – and all will benefit as a result; the consumer and borrower, as well as the lender.”
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.
The catalysts for the next cycle
of growth include the resolution of the banking crises through the ‘bad bank’; AMCON ( Asset Management Corp. of Nigeria), the successful privatisation of the power sector and a move towards stable inflation and as a result, much lower interest rates, according to analysts.
Transnational Corp. of Nigeria Plc, which has interests in power, hotels, agriculture and oil, plans to raise N15 billion ($95 million) partly from banks for its Ughelli Power plant, chairman Tony Elumelu said last month.
Nigeria’s inflation rate climbed to 9.5 percent in February, the NBS said on March 17, accelerating from 9 percent in January, although it is still below the double digits level.
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.
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.
“Looking at the banks’ loan composition by sector exposure, lending to consumer stands at about 12 percent on average, as at Q3:2012,” Abiodun Keripe, an analyst at Investment One financial services limited said in an email response to questions.
“On a forward basis, I see an expansion in consumer lending given the changing landscape in the banking sector. Retail product initiation coupled with strong leverage on IT will be critical in determining the sector’s growth going forward.”
The Bloomberg Nigerian Stock Exchange (NSE) Banking Index, which tracks Nigeria’s 10 biggest banks by market value, has advanced 22.70 percent this year, compared with a 23.04 percent rise in the wider NSE All Share Index (ASI).
According to Khan, keeping inflation expectations muted however, will be the basis for any meaningful credit expansion by banks in the long term.
“The starting point (for South Africa) was to make affordable credit available, not through artificial means , but the tried and tested means of achieving low inflation over time,” Khan said.
“That has to be the most stable basis for any lending take-off. Nigeria has benefited from tighter policy, but it is not there yet.”