2012 Banking Landscape

In 2012, Nigerian banks management faced the challenge of trying to beat high earnings expectations which encouraged them to leverage on the high yield environment and increase exposure to fixed income securities in order to maximize tax free returns. We expect this “treasury focused” investment strategy to moderate in 2013 as outlook on yields and fee income decline. Tier-1 Banks account for 68.0% of the N21.3 trillion of industry assets, with First Bank alone racking up a N3.2 trillion asset base (or 15.0% of industry assets).

A look at banks profitability in 2012 shows a clear separation of the boys from the men as all Tier-1 banks recorded gross earnings in excess of N200 billion compared to Tier-2 banks’N102.0 billion average. Our DuPont analysis of banks’ 2012 ROE also revealed that most Tier-1 banks’ impressive earnings resulted from high profit margin whereas Tier-2 banks depend more on asset turnover to grow earnings.

Emerging Trends and Outlook

Afrinvest Research believes that the future of the Nigerian banking space will rest on ancillary banking services such as Merchant Banking and Primary Mortgage Institutions; as well as Retail and SME banking. The industry is now confronted with the reality of declining fee incomes, mobile money and dollar denominated capital sourcing. The era of “real banking” appears to be gradually re-emerging as traditional sources of high income/profitability continue to come under threat from increased competition and tighter regulation. On a balance of options, we expect a blend of the following service models to characterize the Nigerian banking space within the next 5 years:

* Outlook on yields and fee income remain downwards, necessitating the need for banks to focus on lending to the real sector.* Banks need to develop and grow the depth of their core retail banking business to retain and amplify cheap deposits.* Banks need to expand their geographic footprint and business scope as urbanization gradually remodels cities and sub-urban areas.* Mid-Tier banks will need to consolidate and integrate vertically in order to compete with Tier-1 banks as economies of scale and scope increasingly become differentiating success factors.

Source: Afrinvest