Analysts at CardinalStone Research have projected that the banking sector could have a robust core operating performance in 2024.
In its latest banking sector report, the firm said the performance will be due to the sustained hawkish disposition of the Central Bank of Nigeria — in line with recent guidance on sustained tightening until the second quarter of this year.
Others are the reinstatement of orthodox monetary practices and continued Cash Reserve Ratio, normalisation, robust trading and fixed income earnings on the resumption of Open Market Operation auctions and higher bank placement rates.
“Banking earnings touched new highs in nine months of 2023, aided by material revaluation gains driven by the policy reforms on foreign exchange management that led to significant currency depreciation,” the report said.
It said in 2024, after-tax earnings may be relatively contained due to an expected tamer naira weakening (vs in 2023) as the CBN intensifies efforts to stabilise the naira.
“The effort of the CBN to rein in the high inflation drove interest rates to new highs in 2023, with pass-through to banks’ interest income and interest expense,” it added.
According to the report, the net impact of the rising interest rate was positive, as the benefits from higher asset yields combined with a larger interest-earning asset base outweighed drags from higher cost-of-funds.
“The CBN’s guidance and body language indicate a sustained tightening stance in the first half of 2024, suggesting higher fixed-income yields, which is positive for banks,” the report said.
“From our sensitivity analysis, we assess that a 100 basis points increase in interest rate will likely translate into an average 8.5 percent rise in interest income across our banking coverage (excluding Ecobank Transnational),” it added.
Since the devaluation of the currency in June, banks with foreign assets have recorded a surge in their profits.
In the first half of last year, the combined profit after tax of eight banks rose by 237.8 percent to N1.31 trillion, the highest in at least four years, from N388.8 billion in the same period of 2022, according to their latest unaudited financial statements.
Authors of the report noted that revaluation gains accounted for a cumulative 40 percent of their coverage banks’ excluding Ecobank Transnational in nine months of 2023, outpacing the usual big contributors like fee-based income and propping the total non-interest revenue contribution to 37.5 percent, versus a 3-year average of 31.9 percent.
“However, this distribution is expected to change in 2024, with non-interest revenue set to contract due to projected tamer currency devaluation over the full year,” it said.
“Nevertheless, we are optimistic about core NIR (excluding revaluation gains) over the long run on the continued pivot of banks to HoldCo structure and the associated introduction of business lines —pension, payments, asset management, and insurance.”
It added that consistent with this position is the fact that Stanbic (a pioneer HoldCo structure operator in the sector) has boasted the highest non-interest revenue contribution to total income (47.2 percent) over the last six years.
“The holding company’s non-interest revenue was principally supported by fee and commission income primarily from the PFA and asset management business. “Nevertheless, coverage banks reported an unchanged mean non-performing loan ratio1 of 3.7 percent in nine months 2023, a testament to banks’ risk management strength.”