Banks to improve earnings generation capacity – Moody’s

The Nigerian banking sector is set to maintain improved financial metrics and further improve its earnings-generating capacity. This is owing to accommodative operating conditions and supported by authorities’ remedial actions following the 2009 banking crisis, says Moody’s Investors Service in a new special comment released June 19.

The report titled, ‘Sub-Saharan Africa: Banking Overview’, notes that while most banking systems in the region are expected to sustain the current positive trends, progress will not be uniform as key downside risks remain.

“The setting up of the AMCON was instrumental in restoring financial stability as, according to the company, it acquired NPLs worth an estimated N2 trillion; injected capital of N1.566 trillion into five banks; and acquired three bridge banks for N765 billion,” says Constantinos Kypreos, a vice president and senior credit officer at Moody’s and author of the report.

“The banking sector’s potential to grow retail and SME lending remains substantial. However, this potential will remain constrained for as long as an inefficient legal system makes it difficult to enforce collateral, and the lack of credit information (e.g. as provided by a credit bureau) prevents banks from assessing the credit history of potential borrowers.”

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Nigeria, with a population of around 165 million, maintains the largest banking sector in SSA (excluding South Africa) with total assets of around $136 billion as of December 2012, compared to gross domestic product (GDP) of around $259 billion in 2012.

There are 21 banks operating in the system, with the largest being First Bank of Nigeria, Zenith Bank, Guaranty Trust Bank, Access Bank and United Bank of Africa.

Following the 2009 banking crisis, the regulators took a comprehensive set of remedial measures to enhance corporate governance and strengthen regulations and supervision.

Nigerian banks have significantly improved their financial metrics since then, according to Moody’s, with June 2012 NPLs at 4.0 percent of gross loans, a Tier 1 ratio at 17.8 percent and a return on equity of 8.9 percent.

The authorities’ and regulator’s responses have been instrumental in placing the banking sector back onto a sound footing, according to Moody’s.

Despite the improvements, however, the IMF still recommends that authorities enhance cross-border supervision, build capacity for macro-prudential oversight, and wind down the operations of the Asset Management Corporation of Nigeria (AMCON), a ‘bad bank’ set up to absorb impaired loans, in order to curb moral hazard and fiscal risks.