7/9/2018/InvestmentOne Report

Please click to download the H2 2018 Outlook for the Nigerian Banking Sector

·         We are slightly positive in our outlook for the banking sector as we envisage a moderation in cost of risk, accelerated recoveries in previously written off bad loans on the back of improved macroeconomic conditions, lower concerns on asset quality & capital adequacy ratio and relative improvement in system liquidity. However, we highlight concerns over declining fixed income yields which could lead to further contractions in margins and the concentration to the oil & gas sector, given the frigidity of the Niger Delta region. 

·         The negative impact on asset yields have also been revealed in H1 2018 financial results released during the period. During the period, there was a slight moderation in average net interest margin (7.31% in H1 ’18 vs 7.85% in FY ‘17). This was majorly due to a slight increase in average cost of funds especially borrowed funds and a drop in yields on earning assets in the declining yield environment. 

·         We also highlight the recent wave of digital banking awareness that has swept the banking sector. Hard data shows that in Q1 2018, total value traded via e-Platform channels increased by 10% q/q to NGN32.5 trillion. This stems to provide a decent opportunity to boost non-interest income. 

·         Going into H2 2018, we are of the opinion that loan growth would come in muted as we expect a slight uptick in fixed income yields, which would further shift the focus of banks from expanding their loan books to investing more in fixed income securities so as to limit their exposure to credit risk even amidst a potential uptick in system liquidity as electioneering comes into play. 

·         Going into H2 ’18, we expect lenders to come into the local debt market seeking to raise capital to buffer their balance sheets especially in Q3 2018, due to our outlook of the present low yield environment trickling into the quarter. We have it on record that Wema Bank is planning to raise a NGN20 billion bond in August and UBN also coming into the limelight to issue a Eurobond in the second half of 2018, after its recently successful rights issue.