September 30, 2019/Cordros Report
In this report, we discuss the outlook for the banking sector, specifically discussing commercial banks.
Sector Growth Remained Resilient Through Tumultuous Periods
Resilience has become the foreword for the industry since the banking crisis of 2008/2009, as industry players shrugged off the recession in 2016/2017 to continue to deliver double-digit returns on equity. From a fragmented industry with inadequate buffers to withstand systemic stress, the Nigerian banking industry has since evolved and advanced, smoothly assimilating into a more integrated global financial ecosystem, with the banking services offered in-country on par with those in Western countries.
Regulatory Risk to Sector Increasing
The Nigerian banking sector is entering a new phase, in our opinion, which will be reminiscent of a similar one in the not so distant past, when the sector was described as ‘the most regulated, globally’. In past years, regulations were driven by the need to shore up the sector given the vastly more globally interconnected financial system. However, more recently, policy action has been focused on driving market players more towards the traditional function of intermediation.
Timing is everything
The intuition behind the recent policy directives is clear, given that banks have steered away from taking on risk, given the weak macroeconomic environment over the past few years, instead increasing capital allocation to high-yielding fixed income securities. While from an economic perspective the argument for increased credit extension and lower interest rates for driving growth are compelling, in our view, this needs to be in an environment which can structurally allow for these. And so, in our view, the overall risk to the sector is higher than it has been in recent times, especially in the light of increasing global risks.
Value Remains
Despite burgeoning risk in the sector, we are of the view that there remains immense value in the sector, mostly driven by downward price action in the year. We advise long-term investors to take position in our recommended stocks, with a view to market rallying at the tail end of 2020 as expected reforms impact the market positively.
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