Tier-2 banks worst hit by global oil crisis’
The nation’s Tier-2 banks have been adjudged to be the worst hit in the lingering sliding fortunes of international crude oil price, which has affected various calculations of cash flows upon which credit facilities were granted by the banking industry.
The Afrinvest 2015 Nigerian Banking Sector Report, titled “Looking ahead…Nigerian Banking in the Next Decade”, showed that interest in the lending structure of Nigerian banks has been magnified by the plunge in global oil prices.
According to the report, the loan books of banks across both tiers are mainly concentrated in the oil and gas sector (26 per cent), but noted that Tier-2 banks are more exposed to the oil and gas sector, with players in the space allocating 27.4 per cent of their gross loans to the sector in 2014 relative to Tier-1 banks’ 26.5 per cent.
Allocation of credit to the oil and gas sector appears disproportionate to the sector’s contribution to the Gross Domestic Product (GDP) at 11.2 per cent, suggesting a crowding out of other productive sectors of the economy.
For instance, the agriculture sector, which contributed more than 20 per cent to GDP is observed to receive only 4.4% of total credit allocation in 2014.
A further breakdown of the analysis, showed that the structure of lending broadly differed across BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey) countries, a reflection of dynamics of the stages of growth and development, economic structure, financial sector framework and banking regulations in the respective countries.
“We imagine that the preference is based on high revenue/profitability upside, stronger cash flow and developed supportive infrastructures that have lowered risk perception. However, the current challenges of lower crude oil prices has significantly weakened the assets quality of banks, with Oil and Gas related NPLs contributing an average of 12.7 per cent to NPL ratio across banks.
We further observed that the industry’s Net Margin settled at 20 per cent, which was two per cent below 22 per cent average for countries in the BRICS category. Meanwhile, Tier-1 banks continue to dominate the industry across performance metrics as players in the classification accounted for 66 per cent of Gross Earnings (from 65 per cent in 2013), 75 per cent of PBT (from 88 per cent in 2013), 70 per cent of Total Assets (from 68 per cent in 2013), 70 per cent of Total Loans (from 69 per cent in 2013) and 70 per cent of Total Deposits in 2014,” the research team at Afrinvest Securities Limited noted in the report.
Surely, the nation’s banking industry has witnessed phenomenal evolution in the last decade, with some of the key highlights being the consolidation of banking industry in Nigeria in 2005/06; the Lamido Sanusi’s era was anchored on four pillars of enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution, and ensuring the financial sector contributed to the real economy; and while the present era of Governor Godwin Emefiele, has proposed to focus on macroeconomic stability and development finance.
However, against the backdrop of global economic fragility, oil prices touching new lows, with exchange rate volatility and unconventional monetary policy in developed market compared to the hawkish stance in emerging markets, including Nigeria, the nation’s banking industry recorded a gross earnings of N3.3 trillion in 2014 financial year.
The figure represented a 17.7 per cent expansion relative to N2.8 trillion in 2013 financial year, while industry cost to income ratio moderated significantly from 82 per cent in 2013 to 66 per cent in 2014 despite CBN’s hawkish stance on Cash Reserve Requirement and Monetary Policy Rate during the year.
Consequently, profit before tax expanded to N682.3billion, representing 31.6 per cent increase from N501.3 billion in 2013 financial year.
Our prognosis is that lending structure in the next decade should reflect the changing economic structure in Nigeria, thus we expect banks to take advantage of the faster growth and expanding opportunities in the non-oil sectors of the economy.
We believe banks will need to moderate credit to the Mining/Natural Resources sector, while directing to the utilities, manufacturing and services (including household, real estate, education, health, transport and communication) sectors in line with the overall macroeconomic outlook of the country and in furtherance of the recent drive to boost non-oil revenue by the new administration.
Nigerian banking industry has mainly served the mining sector over the past one decade and we believe banking in the next decade should focus on re-allocating risk assets by tapping into lending opportunities in the non-oil oil sector. However, we do not expect banks to reduce funding of the oil and gas sector, rather, but expect banks to deepen funding structure to grow their presence in non-oil sectors,” Afrinvest added.
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