Nigerian banks have emerged best among their BRICS peers with an average return on asset (ROA) and return on equity (ROE) of 15 percent and 1.8 percent respectively, Afrinvest West Africa said in its 2021 banking sector report on Wednesday. This is happening amid a toughening macroeconomic environment for businesses in Nigeria.
BRICS countries include Brazil, Russia, India, China, and South Africa. The BRICS members are known for their significant influence on regional affairs.
On market valuations, the report noted that the price-to-earnings (P/E) and price-to-book value (P/BV) ratios for the selected Nigerian banks settled at 5.4x and 0.5x respectively relative to SSA (18.6x and 1.5x) and BRICS (11.7x and 1.6x) averages.
There was a show of resilience amid the tough macroeconomic, low-yield and tight regulatory environment, said Donald Lawson, Chairman, Afrinvest West Africa Limited.
He said the industry’s gross earnings rose 2.8 percent year-on-year to N5.0 trillion in 2020, albeit at a slower pace relative to 2019 (9.9%), supported by the CBN’s stimulus packages to critical sectors, interest rate reduction on intervention facilities and forbearance for banks to restructure term loans.
“Using CAMEL (Capital adequacy (CAR), Asset quality, Operational Efficiency, Profitability and Market Valuation) analysis, we modelled tier-1 Nigerian banks compared to their SSA and BRICS peers,” the report titled 2021 Nigerian Banking Sector Report Resilience Amidst Endemic and Pandemic Constraints.
The report noted that CAR of selected SSA (19.2%) and BRICS (17.2%) banks recorded was above the 8.0 percent global regulatory minimum under the BASEL III, reflecting effective risk management during the pandemic. However, African peers such as Egypt (21.7%), Ghana (20.2%) and South Africa (19.8%) were better capitalized than the Nigerian banks (19.7%). In the BRICS region, the Nigerian banks fared better than their peers save South Africa.
In terms of asset quality, the report stated that the negative impact from COVID-19 on risk assets weighed on Sub-Saharan Africa (SSA) and BRICS banks leading to a substantial rise in impairment charges.
The average combined operating ratios (CoR) of selected SSA and BRICS banks stood at 2.6 percent and 2.4 percent respectively. Kenya banks (3.6%) reported the highest average CoR among the banks in the SSA region, trailed by South Africa (3.5%). Equally, across the BRICS region, the Brazilian banks (3.9%) remained the worst performers reflecting the higher business risk environment.
The Nigerian tier-1 banks (1.8%) performed relatively better than their peers save Egypt (1.7%), Morocco (1.7%), Russia (1.4%) and China (1.0%).
On operational efficiency, the report said across the SSA and BRICS region, the average cost to income (CIR) for most banks is quite high. In the SSA region, the Nigerian banks (58.0%) were the worst performers given the rise in operating expenses and moderation in operating income. Nevertheless, Egypt (35.8%) maintained the top spot, trailing Ghana (51.5%) and Kenya (52.7%). Across the BRICS region, Chinese banks remained the most efficient with an average CIR of 34.8 percent while Brazilian banks (77.3%) came in at the bottom.
Surprisingly, the report said across both SSA and BRICS regions, Ghanaian banks reported the best ROE and ROA of 23.1 percent and 3.5 percent respectively due to better-than-expected operational efficiency within the period.
This implied that Nigerian banks are still relatively undervalued, even as the Nigerian Exchange Limited recorded a strong performance in 2020.
In his presentation on the Nigerian macroeconomic environment and review 2020 Nigerian banking sector, Victor Ndukauba, deputy managing director, Afrinvest West Africa Limited, said Broadly speaking, is safe to conclude that the Nigerian banking sector remained resilient in the face of COVID-19 and several regulatory headwinds.
Nevertheless, banks’ earnings and asset quality have taken a beating while being under pressure from competition.
Also, the pandemic has provided learning points for players in the sector to reshape and reimagine their product/services offerings for long-term growth and sustainability. As the broader economy recovers, regulators are expected to relax the support given to the financial system which might affect some segments of the bank’s business.
The banking sector faces a continuous period of uncertainty, and the resilience of the sector would depend on players’ response to new developments, he said.
The official launch of the banking sector report featured a panel session which was moderated by Ike Chioke, Group managing director/CEO, Afrinvest West Africa.
Other speakers include Samir Gadio, head Africa strategy, Standard Chartered Bank, Muda Yusuf, economist/CEO, Center for Promotion of Private Enterprise (CPPE), Fatumata Coker, chairman Afrinvest Securities Limited, and Ayodeji Ebo, head, retail investment, Chapel Hill Denham.