For the year 2017, Nigerian banks broadly outperformed. The NGSE-BK10 Index was up 73.3%y/y, outperforming the broader market (NGSE INDX: 42.3%) and Emerging market banks (MSCI -EM BNK: 27.6%). However, relative to 2017, earnings are likely to come under renewed pressure in 2018.
We summarize our outlook of the sector in 2018 along four key themes:
#1: Lower rates
Banks will have to weather a lower-rate environment in 2018. Though the big tier-1 players remain defensive, given their scale advantage, we anticipate more earnings upside from tier-2 players whose biggest benefit would come from a sharp decline in the cost of funds.
#2: Modest loan growth
The expectation of improved system liquidity in 2018, on account of reduced government borrowing, should be positive for credit growth, potentially helping to compensate for the loss in income from securities portfolios.
#3: IFRS 9 implementation
The proactive nature of the provisioning, as specified in IFRS 9, may increase Cost of Risks and reduce Capital Adequacy Ratios across the sector. Notwithstanding, improving macro climate should continue to bode well for asset quality.
#4: Capital Raising
Improved market valuation, the need to shore up capital buffers, and lower interests will likely prompt more capital raising for banks in 2018. Increased domestic dollar liquidity should, however, moderate Eurobond issuances.
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