The Nigerian banking industry is said to be resilient in spite of the impact of the Covid-19 pandemic, which hurts the global economy.
The health of banks was, generally, sound in the first half of 2020, as industry levels of capital adequacy and liquidity ratios remained higher than the regulatory minimum. The stress test result of the banking industry solvency and liquidity position was positive and resilient under mild to moderate scenarios, according to the Nigeria Central Bank’s economic report for the first half of 2020.
Data on the Nigerian banking system pre and post covid-19 as compiled by the Nigeria Deposit Insurance Corporation (NDIC) show that profit before tax of the banking sector, on quarter on quarter basis, grew by 8.50 percent from N202.26 billion in the first quarter (Q1) of 2020 to N219.34 billion in the second quarter (Q2) 2020.
Banks’ interest income rose by 10.57 percent to N796.97 billion in Q2 2020, compared to N720.81 billion in Q1 2020.
Net interest income of the industry increased by 15.32 percent to N494.33 billion in Q2 2020, from N428.67 billion in Q1 2020.
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With the current status of the banking industry, is there still need for mergers and acquisition? All the analysts in the financial services sector polled by BusinessDay, except one, affirmed there is a need for M&A.
Uche Uwaleke, professor of capital market and president of Capital market Academics of Nigeria, sees mergers and acquisitions happening in the banking sector.
“Apart from the big Deposit Money Banks, especially the FUGAZ (FBN, UBA, GTB, Access and Zenith) that are relatively well capitalised, a number of 2nd and 3rd tier banks are still challenged by high non-performing loans, capital adequacy issues and low book values- a development exacerbated by the impact of COVID’19 on the Banking industry,” Uwaleke said.
The new normal in the banking sector, occasioned by COVID’19, requires a lot of investment in IT infrastructure, he said.
For some of these banks, he said, the option of raising additional capital through the capital market may prove difficult and expensive given their poor fundamentals.
“So, some of these banks may become candidates for M&A as a survival strategy rather than go the liquidation route with adverse consequences for investors and depositors.
This is more so that the new BOFIA 2020 seems to encourage M&A by raising the standards of banking regulations in Nigeria, the compliance of which will be easier for strong banks to meet,” he said further.
Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), clearly stated that within the five years of his second administration, the apex bank would pursue a programme of recapitalising the banking Industry so as to position Nigerian banks among the top 500 in the world.
Consequently, the banks would be required to maintain higher level of capital as well as liquid assets in order to reduce the impact of an economic crisis on the financial system.
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, however, does not see M&A in the sector, as he said, “I see more digital banks emerging very soon”.
On his part, Olalekan Aworinde, senior lecturer, Department of Economics, Pan-Atlantic University, Lagos, said, “I see mergers and acquisitions happening in the banking sector in Nigeria. The latest of such is the merger of Access Bank and Diamond bank which took off in the second quarter of 2019 and there is the tendency to see more of that.”
He said the banks in Nigeria are not mega banks simply because there is none which is a one-stop branch where financial intermediation can take place.
He said there is the need for a mega bank that will be able to bring funds from the surplus side to the deficit side and this is majorly lacking in Nigeria.
Aside moving of funds, he said, there is a need of a mega bank that will be able to give long terms loans to prospective borrowers, at present it is only short and medium term loan.
In addition, Aworinde said some of the deposit money banks in Nigeria are regional banks and there is a need for them to be national, hence the need for mergers and acquisitions.
Furthermore, he said there is a need for mergers and acquisitions so as to gain market penetration and increase market share.
The idea behind this is that when market share increases, the firm will get large and gains market share which will, in turn, lead to greater competition.
The merger of banks will also reduce the cost of operations, thereby avoiding replication. However, care must be taken in mergers and acquisitions, he said, as it can lead to dis-economies of scale, unemployment and also creates communication gap among employees arising from different norms and cultures of the banks, Aworinde said.
