Although the global financial crisis has put Nigeria's banking industry under significant pressure, most still believe the sector has a bright future. Olubunmi Asaolu, from CSL Stockbrokers Limited, looks at the current state of Nigeria's banking industry and explains where future growth will come from.

With a population of over 140 million, the largest in Africa, and substantial mineral resources, Nigeria has always had the catalysts to support long-term growth for the banking industry.

Unfortunately, the country's crippling debt in the 1990s and an unstable political climate meant that much of this potential was untapped. At the beginning of the last decade however, many of these factors reversed and paved the way for the significant transformation that was to follow in the banking sector.

The main catalyst was a series of measures introduced by the Central Bank of Nigeria (CBN) in July 2004 (13 point agenda) of which the most significant was the requirement that banks have a minimum capital of N25 billion (US$ 170 million) by December 2005. A wave of consolidation followed as banks tried to comply. The industry now consists of 24 banks, down from 89 before the consolidation. Some banks have kept their identity largely intact while the banks that failed to meet the requirements by the deadline had their licences revoked by the CBN.

Due to the capital raising which featured during and after the consolidation process, growth in the sector accelerated after 2005; asset growth jumped to around 50% in the 2006-2007 period from a range of 10%-20% previously. Recently however, funding via capital markets has been difficult as the credit crunch took its toll. The international credit lines that the banks previously enjoyed have also been scaled down or now have less attractive terms. Consequently, while we still think banks will grow their balance sheet and earnings, we expect a significant slowdown over the next twelve to eighteen months.

Nigerian banks are some of the best capitalised in the world, with capital adequacy ratios (CAR) around 22%, much higher than international standards (BIS limit: 8%). Deterioration in asset quality is the main risk they currently face, especially with their margin loan exposure, although we believe the system capital strength is robust enough. Margin loans gained prominence because the banks got carried away with the bull-run which gathered pace through 2006 and 2007. Once the market began to sell off in March 2008, the inadequacy of the measures that some of the banks took to mitigate this risk was magnified. Although some began reducing their exposure shortly after, the CBN’s estimate of the industry’s total exposure of N700 billion - N800 billion ($4.7 billion - $5.4 billion) is still significant.

The regulatory response to the margin loan issue was a temporary reprieve. On October 2, 2008, the CBN issued a circular, allowing the banks to reschedule their margin loan facilities till December 2009. As a result, provisions on banks’ P&Ls though 2009 should be lower than they would have been if the circular had not been issued.

Beyond the near to medium term, the case for structural long term growth of the banking industry is strong. The under-penetration of the sector, measured by deposits/GDP, stands out as the largest single potential driver. Despite banks' aggressive expansion into retail, the public and corporate sectors still account for the larger share of deposits.

Due to the regulator's high liquidity requirements, loans and advances make up 45% of banks' assets and have been driven by the private sector. Although disclosure by the banks is inconsistent, where available, oil and mining, manufacturing, construction, real estate and general commerce are dominant. The lack of a credit bureau system is largely responsible for retail's poor showing but the high interest rate environment is also a limiting factor; encouragingly, initiatives to address this are underway.

While there is some level of differentiation in the banks' execution, the strategies are similar: expand into retail, consumer and SME or target the supply chain and employees around a corporate customer. Although some industry dynamics have not changed, there are some visible effects in market share dynamics and the profit margin profiles of the banks as these strategies are being rolled out.

We believe the size of the opportunity in the sector can sustain loan growth of 15% (CAGR) through 2020 assuming (1) money supply growth averages 15% over the next decade (c. 30% previously) and (2) keeping penetration and liquidity rates unchanged. We estimate growth in interest income could contribute at least 12% to earnings growth (CAGR) over the same period.

Beyond the current downturn, as long as regulation, government policies, corporate governance, and risk management move in the right direction, we believe the sector can deliver much of the promised potential.

CSL Stockbrokers Limited (CSLS) is a wholly owned stockbroking subsidiary of First City Monument Bank and a member of FCMB Capital Market Subgroup. CSLS is one of the oldest stockbroking firms in Nigeria and was licensed in September 1977 by the Nigerian Stock Exchange to deal in securities quoted on the Exchange.

Contact Details

CSL Stockbrokers Limited

Head Office:
2nd - 3rd Floor,
Primrose Tower,
17A, Tinubu Street,
Lagos

Email: cslstockbrokers@firstcitygroup.com
Website: http://csls.firstcitygroup.com/