Banking Remains Resilient

Equity market Equities market closed south as bears dominated banking stocks
Photo by Mark Finn on Unsplash

The Nigerian banking sector dynamics continued to change in 2020. By the National Bureau of Statistics (NBS) estimates, the financial services sector came through as one of the best performing sectors in the economy despite the recession.

The sector printed a 6.89% growth in Q3-2020 (Vs. -3.1% expansion for the broader economy). Notably, total assets for banks saw double-digit growth, thanks to the massive expansion in cash & cash equivalents, amid increased system liquidity and exchange rate devaluation.

Industry NPLs sustained a downtrend so far in 2020

Banking Remains Resilient Brandspurng
Sources: CBN, NBS, United Capital Research

With pressure from the CBN on banks to lend, Nigerian banks expanded their loan books by a massive N4.0trn while interest rates on lending and deposits fell to record levels.

While previous episodes of aggressive increase in loan growth appear to have been associated with a surge in Non-Performing loans ratios, it is interesting to note that industry NPLs sustained a downtrend so far in 2020, sliding from 9.3% in Q2-2019 to 5.7% as at Q3- 2020, despite the threat of Covid-19 pandemic on asset quality across the sector.

Equities market closed south as bears dominated banking stocks
Photo by Mark Finn on Unsplash

Notably, this number was partly moderated by the CBN’s stance for banks to grant a forbearance period to customers at the start of the pandemic.

Going forward, we imagine that banks will be compelled to sustain credit expansion to the real sector with the main beneficiary being the Manufacturing, General Commerce, Agric and Forestry, Construction and ICT sectors considering the CBN’s increased efforts to reduce credit expansion to the oil & gas sector while expanding credit to other sectors.

Nevertheless, we think asset quality concerns in the sector would possibly worsen as the loan book continues to expand. As such, NPL ratios are likely to retrace northwards.