Agusto Projects 23% Return On Equity For Nigeria’s Banking Industry In 2022

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Agusto & Co. has projected a 23% return on equity in 2022 for Nigeria’s banking industry. The pan-African credit rating agency and business information provider stated this in its recently released 2022 Nigerian Banking Industry Report.

The 2022 edition of the annual report provides a review of Nigeria’s banking industry and the near-term expectation for the Industry.

In FY 2022, Agusto & Co projects a decline in the Industry’s net interest spread as the prevailing low yields on government securities, which dominate the Industry’s investment securities, will moderate the impact of the uptick in interest rates.

However, the agency anticipates an increase in the net earnings driven largely by higher trading income and electronic banking fees.

The projections

Nevertheless, the agency notes that the forthcoming elections and growing budget deficit have forced the FGN to modify several extant tax legislations, which will moderate the banking industry’s profits. Overall, Agusto & Co expects the Industry’s pre-tax return on average equity to increase to 23% (FY 2021: 20.6%) in FY 2022.

Agusto & Co. notes positively the resilience shown by the Nigerian banking industry in FY 2021, as the Industry’s loan portfolio grew by 21% despite the weak economy and regulatory constraints.

Agusto Projects 23% Return On Equity For Nigeria’s Banking Industry In 2022

“Notwithstanding the prevailing global supply constraints, the Russian-Ukraine crisis and insecurity challenges that continue to hamper food and crude oil production in Nigeria, we anticipate a 16.5% year-on-year loan growth in 2022 as more banks now have a better understanding of the macroeconomic headwinds.

Traditional sectors such as oil and gas, manufacturing, general commerce and agriculture sectors are expected to drive the loan growth given the backward integration initiatives of obligors, the intervention activities of the CBN and the import-dependence nature of the Nigerian economy.

While the arbitrary cash reserve deductions and foreign exchange illiquidity would remain limitations to the growth of the Industry’s loan portfolio, we note that more banks are now favourably disposed to accessing the differentiated cash reserve requirement (DCRR) window to reduce the value of sterile restricted funds with the CBN.
“In the near term, we believe the Industry’s asset quality will remain acceptable, with the impaired loan ratio hovering around 6% as at 31 December 2022.

In our view, a proactive tightening of controls around loan origination and intensified loan monitoring will moderate the impact of the tough operating climate on the loan portfolio.

“Nigeria’s banking industry remains well capitalised relative to the business risks undertaken and should remain so in the near term.

In preparation for the full implementation of Basel III and based on the scheduled growth plans, we expect an increased appetite for perpetual bond issuances which qualify as additional tier 1 capital. We also believe that some banks will raise common equity tier 1 capital that will keep the Industry’s capital adequacy ratio above 17%.

Our financial prospects for Industry are largely stable in the near term. We adjudge the Industry as resilient and the current trend of banks adopting the holding company structure to diversify into other financial services segments while exercising control over subsidiaries should support the Industry’s profitability.

“The African Continental Free Trade Area (AfCFTA) is also another vital prospect for Nigerian banks given that financial institutions with a strong capital base and efficient network across the continent are essential for the full implementation of AfCFTA. Overall, Agusto & Co believes the banking industry’s performance will remain moderate in the short to medium term and on this basis, our outlook for the Industry is stable”.