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Credit expansion will define banking competition in 2018-Coronation Research

By Babajide Komolafe

The ability of banks to expand credit to the real sector will define the nature of competition in the banking industry in 2018.

Coronation Research, a member of the Coronation Merchant Bank, stated this in its 2018 forecast for Nigerian banks.

Banking hall

“The ability to support risk asset creation in the real sector will differentiate winners from losers in the Nigerian banking industry over the next three years. Leaving capital raising aside, 2018 presents a golden opportunity for the stronger banks to expand loan books and gain market share, the report stated.

While the quality of asset in the industry is generally improving, the firm believes the best capitalized banks will move well ahead of their competitors.

According to the Head of Research, Guy Czartoryski, “For two years, Nigerian banks have had an easy time, earning good income on risk-free government-backed, Naira-denominated securities. That era is drawing to a close as T-bill rates fall. Asset yields are trending south, and it is almost impossible to re-price liabilities to match. So, banks must either find other sources of income or face an average 15 percent drop in their Profits Before Tax expectation for 2018. For the banks to replace the portion of income threatened by declining yields on securities, they must grow risk-weighted assets. This means a 6.0 percent to 12 percent rise in customer loans in 2018.”

The report categorizes banks into three tiers; Group A, Group B and Group C. Banks in Group A, being the most well capitalized, have the biggest opportunity to increase consumer lending. According to the report, Group A includes Zenith Bank, GTBank and Stanbic IBTC, which have the ability to significantly expand their loan books by 69 percent, 82 percent and 182 percent respectively. Group B, including UBA, Access Bank and Fidelity Bank, have moderate capital levels and some ability to expand loans books but may also pursue tier II capital raise in the form of long-term subordinated debt. Group C, including FBNH, Diamond Bank and Sterling Bank, in the short to medium term have limited ability to expand their loans books and will most likely focus on dealing with capital issues and might attempt to raise long term capital from the capital market.

According to Coronation Research, “If equity markets are sufficiently strong, some banks might attempt equity capital increases (Tier-I) this year. However, currently we have market valuations so low as to make equity capital dilute the interest of existing shareholders. So, the preferred capital-raising route is likely to be long-term subordinated debt (Tier-II). We expect market share in customer lending to flow from banks in Group C towards those in Group A. With banks in Group B we see some, but perhaps not significant, market share gains.”


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