Nigeria’s banks remain solid in uncertain times

These are contrasting times for the Nigerian banking sector. Domestic economic frailty, the ongoing impact of the Covid-19 pandemic, high global inflation and the effects of the war in Ukraine all create an uncertain economic and fiscal environment in West Africa’s biggest economy. 

The rate of inflation has steadily increased this year, with the impact of the Russian invasion of Ukraine exacerbating inflationary pressures caused by difficulties in rebuilding supply chains in the wake of the pandemic.

The CBN, which is tasked by government with restricting monetary growth during periods of high inflation, responded by increasing its bank lending rate by 1.5% to 13% at the end of May, its first increase since 2016. It is also hoped that the move will boost remittances and help shore up investor confidence.

The war in Ukraine is not a primary driver of inflation, given that price rises are roughly the same now as they were this time last year, but it has certainly helped reverse the modest progress that was made on inflation in the second half of 2021. 

Moreover, the poor security situation in the northeast of the country and limited domestic infrastructure have served to drive agricultural inflation and reinforce supply bottlenecks respectively.

An IMF team that visited Nigeria in June reported that higher inflation was driving “a renewed surge in food prices, exacerbated by the war in Ukraine, and raising food security concerns as over 40% of the population live below the poverty line”.

According to the World Bank’s latest study, Nigeria currently has the world’s eighth-highest inflation rate.

Modest economic recovery

Nigerian GDP grew by 3.98% in the year to the end of the fourth quarter of 2021 and 3.11% in the year to March 2022, roughly in line with the IMF forecast of 3.4% for 2022 as a whole.

This represents a modest recovery given that the economy contracted by 1.92% as a result of pandemic restrictions in 2020, leading to an even bigger fall in per capita GDP because of population growth of 2.5%.

“After the recession experienced by the country in 2020 occasioned by the Covid-19 pandemic, the economy has been on the path of growth,” concluded Nigeria’s own National Bureau of Statistics (NBS).

Total external public debt reached $100.1bn in March, a big increase on the $63.8bn recorded in 2015, according to the Debt Management Office. More than half of this debt is held domestically, placing a huge strain on Nigerian banks and limiting how much capital they have to lend to other borrowers. 

Debt has piled up during President Muhammadu Buhari’s time in office but although he has defended the policy on the grounds that the government is investing in much-needed infrastructure, there are fears that much of the debt has been taken out to maintain recurrent spending.

Low tax revenue

The IMF expects the federal government’s fiscal deficit as a proportion of GDP to remain high this year, at 6.1%, partly because of limited tax revenue collection and continued massive fuel subsidies.

Both have been perennial problems for Nigerian governments and indeed, for the governments of many other African states. Successive Nigerian administrations aimed to reduce diesel and petrol subsidies but abandoned their plans following popular protests.

At the same time, many people lie outside the formal economy, while most of the more prosperous people in formal employment are able to protect their income from taxation. As a result, Nigeria has a tax-to-GDP ratio of just 6%, one of the lowest rates in the world. 

It is calculated that more Nigerians work in the informal sector than in formal employment and these workers are far less affected by interest rate decisions, as they have limited access to credit. The rate rise may therefore have a limited impact on inflation across the economy as a whole.

It will, however, have a bigger impact on state governments, which rely on bank lending to cover budget deficits and so may find it more difficult to secure loans and service existing debt.

Both of the main candidates in Nigeria’s February 2023 presidential election have pledged to increase tax collection and promote the role of the private sector in the economy.

Bola Tinubu of the ruling All Progressives Congress (APC) and former Nigerian Vice-President Atiku Abubakar of the opposition People’s Democratic Party (PDP) look set to jettison the protectionist and import substitution policies of the incumbent, Muhammadu Buhari. 

However, given that both have been fixtures in the political establishment for many years, it seems unlikely that they will pursue radically different economic or fiscal policies. The best hope is for economic evolution rather than revolution. The big question is whether they will be able to privatise at least elements of the state oil company, the Nigerian National Petroleum Company (NNPC). 

Abuja is continuing to benefit from bilateral financial support. In July, the European Union offered Nigeria €1.29bn ($1.3bn) in financing under its Green Deal initiative over the next five years to help create more employment by diversifying the economy, with a particular focus on renewable energy and climate change mitigation. 

The investment will support much-needed projects but will obviously add to the national debt. More lending is also being arranged. In a statement, the EU said: “In parallel, the European Investment Bank sovereign lending will support the agri-food sector access to markets by financing rural roads, as well as climate adaptation and mitigation efforts.”

Perhaps the most important long-term process at present is the impact of banking digitisation, including on ensuring that services are provided to many people who have long been unserved.

Competition between fintech companies and traditional banks is intensifying but the jury is out on whether cooperation or opposition is the better strategy for the country’s main commercial banks.

Will AfCFTA boost Nigeria’s economy?

The CBN hopes that the implementation of the African Continental Free Trade Area (AfCFTA), will have a big impact on the Nigerian economy.

It argues that membership will probably trigger an influx of foreign direct investment into Nigeria; boost GDP; motivate Nigerian small and medium sized enterprises (SMEs) to expand their businesses into other African countries; and contribute substantially to the development of the manufacturing sector. 

It will also create opportunities for Nigerian professionals to seek employment in other African countries; increase non-oil commodity exports and manufactured goods; and increase the number of companies listing on the Nigerian Stock Exchange (NSE) by opening up the economy to foreign companies, according to the CBN.

It is understandable that the CBN is optimistic about the AfCFTA’s potential given that it has been involved in its development from the very start. Even now, it is participating in several AfCFTA action groups, including those dedicated to eliminating non-tariff barriers and promoting African manufacturing. In addition, the Governor of the CBN has been designated AfCFTA Champion of the Financial Services Sector.

In a statement, the CBN said: “The banking subsector was identified as one of the foremost subsectors in Nigeria, with the potential to benefit greatly from the AfCFTA Agreement. This is expected, considering that prior to the commencement of the Agreement, Nigerian banks were already rated among the largest in Africa in terms of asset size, capital base, and market shares.”

About a third of the 168 companies listed on the NSE as of early 2022 operate in the financial services sector.

If banking markets across the continent are opened up to greater competition as a result of the AfCFTA, Nigerian banks could be both forced to face greater competition from other big African banks at home and benefit from expanding into other countries. 

This process has already begun, with Nigeria’s biggest banks already targeting other Anglophone markets in particular. For instance, UBA, GTBank and Access Bank now all operate in Kenya.

At present, restrictions are placed on the repatriation of the investments and dividends of foreign-owned banks held in Nigeria but these could be lifted over time, encouraging more foreign banks to move into the market.

Nigeria’s Banks remain solid

Amid huge global and domestic economic challenges, the banking sector has remained stronger than the overall national economy, with rising profits and capital adequacy liquidity ratios remaining above regulated limits. 

The role of the Central Bank of Nigeria (CBN) has been key in this, weeding out struggling banks and forcing those that remained to strengthen in order to be better prepared to withstand negative economic conditions. 

Most recently, it has encouraged them to increase their lending to the non-oil segment to produce the more diverse economy that is the country’s only real hope of significant economic development and higher living standards.

Nigeria’s banking sector has gradually strengthened over the more than two decades since it returned to civilian rule, with the number of banks reduced to create a smaller, better capitalised pool of 23 institutions through a process of mergers, acquisitions and higher capital and reserves requirements from the CBN. 

The central bank said in July that the banking system was sound, stable and resilient and there are certainly reasons for optimism, with total industry assets growing by 20.97% in the year to April 2022, to N64.32tn.

Zenith Bank was ranked the biggest bank in Nigeria in the 2021 African Business  magazine’s 100 Top Banks survey, with Tier 1 capital – which represents a total of capital, reserves, retained earnings and minority interests – up 15% to $2.3bn. Yet despite being based in the continent’s biggest economy, it was still just the 13^th biggest bank in Africa, with South African and North African banks continuing to dominate the rankings.

Ebenezer Onyeagwu, Zenith’s CEO for three years, has been at the bank for two decades and his appointment follows in Zenith’s tradition of promoting from within. Although he studied in the UK and US, he has worked in the Nigerian banking sector for almost 30 years.

Working his way up through Zenith’s ranks, he became executive director in 2013, taking charge of the South-South and Lagos zones. Prior to becoming chief executive, he had served as deputy managing director for three years.

The next biggest banks in Nigeria are First Bank of Nigeria (FBN), ranked 17^th in Africa with Tier 1 capital of $2bn; Access Bank at 21^st; United Bank for Africa (UBA) in 22^nd place; and Guaranty Trust Bank, in 23^rd.

In total, there are a dozen Nigerian banks in Africa’s Top 100 but this too is less representation than might be expected given the size of the Nigerian economy and the fact that the country hosts a sixth of the total African population. However, fewer, stronger banks are better than having more numerous but weaker financial institutions, so this perhaps is less of a concern.

FBN’s Sam Aiyere was appointed CEO in June 2019 to drive “systemic organisational change”, according to the bank.

Another with two decades’ experience at his current bank, he has worked in a variety of departments, including in project management, banking operations, strategy and business development, and has also been the CFO. FBN is keen to present an image of responsible banking, arguing that Aiyere is creating “an environment that enables staff to flourish, safely operates within the regulatory framework, contributes to society and ultimately delivers to shareholders”.

Nigeria’s banks produce strong results 

Although Nigeria and the global community were still in the middle of the pandemic in 2021, Nigeria’s banks produced strong results for the year to the end of December 2021. 

For instance, Access Bank reported a 27% increase in gross earnings to N971.9bn ($2.34bn), with pre-tax profits up 40% to N176.7bn, net profits up 51% and total assets up 35% to N11.7tn ($28bn). For its part, UBA recorded a 7% rise in gross earnings to N660.2bn ($1.59bn), a 20.3% jump in profits before tax to N153.1bn, an 8.7% rise in post-tax profits to N118.7bn and an 11% rise in total assets to N8.5tn ($20bn). 

Taking up his new post at Access Bank in May 2022, Roosevelt Ogbonnais the newest MD/CEO among Nigeria’s biggest banks. He joined his current bank from GTBank – formerly known as Guaranty Trust Bank – in 2002, serving as Access Bank’s executive director and managing director in the decade prior to being appointed CEO. Ogbonna is another senior Nigerian banking executive with a rich academic background in the UK and US, although he can also add Switzerland and China to that list.

As barriers to more integrated banking are eroded, Ecobank could be well placed to make further inroads into the Nigerian market and elsewhere, given that it operates in more African countries than any other bank. 

It is based in Togo but its Nigerian offshoot, Ecobank Nigeria, is a growing force in Africa’s biggest economy. The appointment of Bolaji Lawal as the managing director of Ecobank Nigeria hints at the bank’s strategic direction, given that he has been a digital transformation specialist for many years. 

Prior to joining Ecobank, he held a range of positions at GTBank and indeed, implemented its retail and digital banking strategy over a 10-year period, with a remit to improve access to digital financial services.

While the CEOs of Nigeria’s very biggest banks are all men, eight of the country’s 23 banks now have female chief executives, according to the CBN. 

CBN Governor Godwin Emefiele said that the central bank has been working to increase the role of women in the industry, including female boardroom participation among the criteria in its annual review of bank operations, in order to break the established gender bias in the sector. 

The CBN, which itself has similar representation among its workforce, demands at least 30% female representation on boards and 40% at the top management level in the banking industry. 

Despite the huge challenges facing the wider economy, the outlook for Nigerian banks looks relatively stable. The ratio of non-performing loans (NPLs) stood at 5.31% at the end of April 2022, slightly above the prudential threshold of 5.00% but a significant improvement on the 5.89% recorded at the end of April 2021. 

The figure should fall to the regulatory limit by 2023, while banking sector net external debt should average 4.4% of total loans during 2022, according to S&P. However, Nigerian banks are unlikely to improve their cost base materially despite increasing revenue because of the high Asset Management Corporation of Nigeria levy.