The banking sector may have settled for some major shifts in their operations and fortune in 2022, a development which will significantly affect customers’ businesses and ultimately, lifestyle as well as the entire economic fortune of the people and the country.
Financial analysts have indicated that key areas to be effected include foreign exchange and exchange rate; interest rates for both deposits/ savings and lendings/ borrowings; and equity investors in banking stocks.
Exchange rate
The analysts see significant depreciation across major foreign exchange windows with the official interbank window, the Investor and Exporters (I&E) window FX rate at N482/$1 before end of 2022.
This development would also be replayed in the parallel market where the current rate of N565/$1 is expected to cross the N600 mark by year end.
For the an economy that is import dependent, this would lead to higher cost of imported goods as well as locally produced goods that depend on imported raw materials.
However, some other views are that some current developments and circumstances in the country may play down the exchange rate volatility and Naira depreciation.
For instance, Nigeria is currently riding on strong oil prices with oil currently trading at over $90/bl as against the 2022 budget benchmark of $62/bl. This breeds a seemingly healthy import cover of 7.9 months.
It is also believed amongst the analysts that the upcoming elections in 2023 could see the Central Bank of Nigeria, CBN, opting to keep the exchange rate stable by all means for political reasons.
But digging deeper into the foreign exchange market dynamics in 2022, analysts at Agusto & Co, a financial rating firm, are of the view that the wide gap between the exchange rate at the official window and the parallel market would be sustained, which will further frustrate policies while pressuring costs across all sectors.
They also believe that foreign currency inflow will not improve due to policy bottlenecks, a situation which will sustain supply gaps. Responding to the question, ‘‘Will Naira/ USD rates converge in 2022 at premium below 5%’’, they stated: ‘‘No, because we have a Central Bank that is trying to peg the rate at which the Naira exchanges for the USD even though there is, on average, a 10% difference between the inflation rates of the two currencies’’.
Responding to the question of possible foreign currency inflows to support domestic and official supply, they stated: ‘‘Not likely, because the CBN continues to peg NGN/USD at rates below equilibrium. i.e. rates at which the CBN is the only seller and every other person wants to buy from them.’’
Loans
The banks are set to slow down on approving loans to individuals and some small sized businesses as they concentrate on middle and big companies due to threat of repayment defaults as well as regulatory challenges.
Consequently, loan growth is estimated to slow down to as low as 10 percent and 15 percent at best through the year as against average 30 percent amongst tier-2 banks in 2021.
Analysts at Renaissance Capital (Rencap), a leading global financial institution that has significant operations in Nigeria, stated last week: ‘‘Going into 2022, we model for loan growth of 10-15% as we believe that the banks may take a more cautious stance on credit growth ahead of the 2023 elections. ‘‘We also note that the implementation of Basel III (stability and safety requirements for banks) and its higher capital requirements could also dampen the banks’ lending appetite.’’
Similarly, analysts at CSL Securities, the investment banking arm of FCMB Group, have downgraded loan growth in 2022.
They stated: ‘‘We forecast average loan growth of 15% for the tier-1 banks based on a confluence of factors. Factors that will limit loan growth includes, Basel III requirements for additional oversight over lending arrangements which we believe will make banks cautious to extend loans.
‘‘Again, an additional tier-1 capital is required for a Capital Conservation Buffer (CCB1) of 1.0% of TRWA. A Countercyclical Capital Buffer (CCB2), to be determined by the CBN periodically taking into consideration the prevailing macroeconomic conditions and developments within the financial sector may also be required. ‘‘Demand for quality loans remain low as project finance has been slow due to COVID-19 while many existing loan transactions are being refinanced through issue of debt instruments.’’
Last year, loan growth was strongest at the Tier-2 banks, rising 47%, 29% and 22% at StanbicIBTC, FCMB and Fidelity Bank. Also First Bank significantly expanded its loan book, with net loans up 25%.
Analysts at Agusto & Co have different perspective to the loan dynamics in 2022. Responding to the question, ‘‘Will the banking industry be able to grow its loans to customers (particularly local currency loans) in real terms’’, they stated: ‘‘Not likely, because the Central Bank is unlikely to reduce cash reserve ratio significantly. This, in addition to liquidity requirements, will constrain the ability of the industry to grow loans to customers.’’
Deposit to grow
On the other hand banks are expected to ramp up their deposit drive in 2022 in response to some countervailing circumstances on their liquidity as well as the evolving situation in the operating environment.
According to analysts at CSL, ‘‘We expect that CRR (Cash Reserve Requirment) debits will continue in 2022, and banks will need to increase deposits.
‘‘We also expect that pre-election spending will drive up cash in circulation and increase money supply given that 2022 is a pre-election year.
‘‘Overall, we forecast average deposit growth rate of 16.0% for the tier-1 banks.’’
The banks were less aggressive on deposit mobilization in 2020 into most part of last year, a situation which meant that customers’ savings and fixed deposits yielded next to nothing.
The CBN’s minimum Loan-to-Deposit, LDR, policy and the policies that brought down yields in 2020 meant that banks were not enthusiastic about sourcing deposits, resulting in a significant decline in deposit rates.
The CBN’s discretionary debits which were very frequent in the second half of 2021, however caused some liquidity problems for many banks, making them approach the apex bank’s Standing Lending Facility, SLF, window and the interbank window with rates between 11-15% in 2021 for the latter. This made banks began to reprice deposits in 2021 in the second half of the year.
It is expected that in 2022 there will be significant improvements in rates for savings and fixed deposits.
Interest rates and earnings
Interest rates (lending and deposit) are poised to go up in 2022. It is believed in the banking industry that the largely low rates recorded in 2021 had curtailed profits. Therefore, the opposite is expected to be the 2022 environment and the banking publics who are depositors are also expected to have better interest rate for their savings/ deposits.
But an improvement in rates may not be enough to return it positive against inflation. This is the view of analysts at Agusto & Co, who, while responding to the question, ‘‘Will real interest rates be positive?’, stated: ‘‘No, because we have an accommodating CBN willing to help the Federal Government borrow from the markets at rates below inflation.’’
Reflecting on the interest rate dynamics in 2022, the analysts at Rencap stated: ‘‘We believe that margins bottomed in 2021 but struggle to see a significant shift in the interest rate environment going into 2022. Although there is room for a rate hike during the year (which is positive for loan yields), we note that that the regulator might opt to take a different stance given: 1) the moderation in inflation in the past few months, decelerating to 15.4% in November 2021 from 15.99% in October (we note that there was a slight uptick in December to 15.6%); and 2) a bid to maintain the status quo as the election draws nearer.
‘‘There is upside risk to Nigerian Treasury Bills (NTB) yields from increased borrowing by the government, but yields may be kept flattish to help control debt servicing obligations and the regulator’s cost of liquidity operations.
‘‘Across the banks we cover, we have modelled for a marginal-to-moderate improvement in margins and note that interest income growth could benefit from low base effects of 2021.’’
Giving further insight the analysts at CSL said, ‘‘Yields on money market instruments began to rise towards the end of 2021 and we expect current levels can be sustained into 2022. ‘‘We expect the continuous CRR debits by the CBN which sterilises funds which otherwise should be earning interest to continue to weigh on asset yields. We do not envisage any further decline in yields on fixed income securities.
‘‘We model an average 92 bases points rise in assets yield of the big banks above 2021 levels.’’
On the CRR debits, analysts at Agusto & Co, while responding to the question if the CBN will reduce the cash reserve ratio to normal levels – not more than 10% of local currency deposits, stated: ‘‘No, because the Central Bank has used a significant portion of these cash reserves to fund hardcore overdrafts to the Federal Government and subsidized loans to the “preferred sectors” of the economy.’’
But there seems to be a mix of fortune coming from e-banking as many bank customers embrace the services amidst stiff competition from Fintechs and telecommunication companies.
The CBN in January 2020 published a revised fee guide for banks, reducing fees for several transactions including e-banking related transactions. This significantly impacted banks’ e-banking income in 2020. But banks have been working to improve transaction volumes to make up for the decline. Again, the growing investment by many banks in digital technology at the onset of the COVID-19 pandemic which has made many customers opt for online transactions, have significantly contributed to growth in Non-Interest Income.
For the analysts at CSL this dynamics may turn out a mixed fortune in 2022 for the banks. They stated: ‘‘We believe banks can increase non-interest income from increased treasury and capital market activities. Also, considering the historical penchant for completing projects during a pre-election year, we expect banks can increase non-interest revenue through bonds, guarantees, LCs etc. ‘‘Though we expect the PSB licenses to be issued to two telcos (MTN and Airtel Africa) to be a threat, we believe banks can take advantage of their competitive advantage in terms of scale and customer history to compete effectively though heavy overhead which telcos do not have can work against the banks.’’
Asset quality
Nigerian banks will continue to maintain soundness in the short to medium terms, at least throughout this year given the current positions in their asset quality. Most analysts believe the stability achieved over the past two years especially with the COVID-19 counter measures, the culture of sound asset quality has come to stay.
For the analysts at Rencap, ‘‘Going into 2022, we do not expect a significant deterioration in asset quality. The regulator’s posture on forbearance, however, is worth monitoring to determine how trends will pan out. We have cautiously maintained similar Cost of Risk, CoR, levels as 2021 in our models.’’
However, analysts at CSL sounded a note of cautious optimism on the asset quality of Nigerian banks in 2022. According to them asset quality may deteriorate moderately but no major disaster is expected in the short term. However, they expect impairment charge to rise. They stated: ‘‘We expect some deterioration in asset quality in 2022 especially if CBN does not extend the forbearance. We forecast an average CoR (Cost of Risk) of 1.7% for the tier-1 banks in 2022.
‘‘We also expect lower recoveries as collateral sale will prove more difficult in the face of weak economic growth.
‘‘We expect this deterioration in asset quality to impact liquidity position of some banks.’’
CoR was an average of 0.9% for the tier-1 banks in the nine months 2021. The low ratio mainly reflects regulatory forbearance due to the coronavirus pandemic which allowed banks to restructure loans to a few sectors impacted by the pandemic.
The forbearance by CBN was extended for another year in 2021 following the expiration of the initial tenor.
Nigerian banks’ asset quality tends continue holding up well through the pandemic, improving to 4.9% in December 2021 as against 6.1% in December 2020, its lowest level since 2015 (prior to the crash in oil prices and subsequent currency devaluation). During the pandemic, Nigerian banks’ asset quality fared relatively better than that of their Sub-Sahara Africa, SSA, counterparts.
Effective tax rate
A major threat to banks’ profitability has however, kicked in since January 2022.
On December 09, 2011, the former president of Nigeria – Dr Goodluck Ebele Jonathan – signed the Companies Income Tax Exemption Order 2011 which decreed tax exemption on the Nigerian Treasury Bills, NTBs, and promissory notes, government and corporate bonds, and the interest earned on these instruments for a period of 10 years, starting January 02, 2012.
Except for federal government bonds, the tax exemptions on these instruments expired on January 02, 2022, implying that from this year, the banks will start to pay tax on income earned on these. Therefore, the banks’ effective tax rate (ETR) is expected to increase, which could adversely affect their net income growth and returns.
Reflecting on the implication of this development, analysts at Rencap stated: ‘‘On our estimates, NTBs and federal government bonds accounted for 19% and 7% of first nine months 2021 assets at the banks in our coverage universe, respectively.
‘‘Speaking to the management teams of various banks, we have received mixed feedback; some feel that the impact on their existing ETR will be negligible, while others argue that it will be more sizable. We have increased our ETR forecasts by 2-3 percentage points (ppts) across the board’’.
Returns
This leads to wider issues of return and profitability of the banks in 2022 which analysts see on the downturn.
Commenting on this the analysts at Rencap stated: ‘‘On our computations, Return on Equity, RoE, and Return on Asset, RoA, of the banks in our universe declined by 1.8 percentage points (ppts) and 40 bases points (bpts) respectively, Year-to-Date (YtD) in 2021. This was largely driven by revenue pressure on both the Net Interest Income, NII and Net Interest Rate, NIR. Stanbic IBTC and Guaranty Trust Bank reported the most significant declines in returns – their RoE fell by 9.5 ppts and 6.2 ppts, respectively, while RoA declined by 1.6 ppts and 1.2 ppts, respectively, YtD.’’
However, for analysts at CSL, the verdict appears more stringent. They stated: ‘‘We expect only a marginal increase in average yields in 2022 as we expect the continuous CRR debits by the CBN which quarantines funds that otherwise should be earning interest to continue to weigh on asset yields. We also expect an increase in funding costs as banks have begun to reprice deposits to reflect current market realities. We expect a rise in CoR in 2022, especially if CBN does not further extend the forbearance.
‘‘We believe banks will continue to struggle to improve efficiency to support bottom line growth and so, we forecast sub inflationary growth in Operating Expenses in 2022.
‘‘Based on the aforementioned factors, we downgrade 2022 earnings marginally for some of the teir-1 banks but, prompted by adequate capital and relatively stable asset quality.’’
Banks’ Net Interest Margins (NIMs) were significantly pressured in 2021 mainly due to weak assets yields exacerbated by a phenomenal increase in CBN’s discretionary CRR debits. Going into 2022, analysts at CSL do not see a sustained pressure on the margins for the banks. They stated: ‘‘We do not envisage any further decline in yields on fixed income securities. Our base case is that yields on NTB will likely rise marginally within the year.
‘‘Overall, we believe Net Interest Margins (NIMs) in the short to medium term will shrink slightly as we expect cost of funds to grow faster than assets yield.’’
On the impact of this position on profitability of the banks, the analysts believe profits would be driven by non-interest revenue growth. They also stated: ‘‘We model an increase in Pre-tax profits for Guaranty Trust Bank and First Bank in 2022 but expect a marginal decline of an average of 3.8% for the other Tier-1 banks.
‘‘In our view, earnings from the newly created subsidiaries of Guaranty Trust Group should gradually contribute to earnings and we expect a decluttered First Bank balance sheet to translate into improved earnings in 2022.’’
CONCLUSIONS
In the perspectives of most financial analysts, 2022 poses various fundamental headwinds for the Nigerian banks such as protracted margin pressure, muted trading and revaluation gains, higher effective tax rate and heightened political risks as the elections draw closer.
