December 17, 2019/Cordros Report

In this report, we discuss the outlook for the banking sector, with a focus on commercial banks.
 
Sector Growth Remained Resilient Through Tumultuous Periods

The Nigerian banking sector is entering a new phase, wherein industry players are legislated to transact in the more traditional business of banking as opposed to allocating more capital to high-yielding risk-free investments, as has been the case over the last few years. In our view, this would have happened over the next few years as yields on fixed-income yields instruments trended downwards, and would have been done in a manner that was legislated by the risk-taking entity. In the manner that this has been initiated, there will be benefits and pitfalls, as the shift is policy-induced and restrictively time-bound. However, in our view, the risk that is being introduced into the system is significant.

Outlook Points to Increased Uncertainty

With the new direction, the trajectory of growth in the revenue of banks will steepen as risk asset portfolios expand. However, this will come with increased systemic risk, given the pace of growth, and the still fragile state of the economy. Consequently, we expect the cost of risk across the industry to spike going towards 2021FY and NPL moderation to temper following an initial dip that will follow the significant loan growth. Notwithstanding, NPLs will spike in the event of any stress to the system, which could easily cascade into wider systemic frailty.

Competition Will Intensify

With the changing dynamics both within and outside the industry, we expect the competitive landscape will become even more intense as banks grapple with new players and more determined old foes. In our view, this could very well be the first flash which eventually leads to consolidation in the industry as some industry players would struggle to compete.

Value Remains, Although Tethered by Market Expectations

We maintain our view that despite increased risk in the sector, there remains immense value, in part due to pressured stock prices which were affected by the generally weak sentiments that pervaded the market in 2019. Consequently, we reiterate our recommendation that long-term investors should look to take positions in our recommended stocks, with a view to extracting value as the market corrects in future periods.

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