May 20, 2025/Cordros Report
In this report, we update our views on the Nigerian Banking Sector. Our coverage stocks have rallied significantly following strong fundamentals and continuously improving outlook amid still supportive macroeconomic conditions. We maintain a positive outlook on the sector driven by multiple underlying factors, specifically citing (1) improved macroeconomic conditions which should bolster credit creation (2) enhanced asset quality, and (3) strengthened capital positions supporting value-accretive investments. That said, downside risks such as regulatory headwinds and cost pressures remain, which may cause modest earnings growth. We reiterate our positive outlook on the Nigerian banking sector, maintaining our “OVERWEIGHT” rating on our coverage names – ACCESSCORP (BUY; TP: NGN35.28/s), FIRSTHOLDCO (BUY; TP: NGN34.97/s), GTCO (BUY; TP: NGN87.14/s), UBA (BUY; TP: NGN58.28/s), and ZENITHBANK (BUY; TP: NGN75.29/s).
Capital backing for Pan-African expansion
We cite that since the 2005 recapitalisation exercise, banks’ gross income has grown at an estimated CAGR of 22.9%, driven by enhanced risky asset creation capabilities and expansion into international markets, amid one-offs such as FX gains from revaluation and currency swaps. We expect the industry to maintain a growth trajectory with the recapitalisation exercise presenting as the key catalyst. Precisely, asides the expected increase in loan books, investments in technology and retail expansion, banks intend to utilise a portion of the new capital to fund deepening presence in the Sub-Saharan African market. While we acknowledge that low financial intermediation metrics in SSA, such as loan-to-GDP (34.5%) and deposit-to-GDP (39.1%) ratios, do not on their own confirm a supply-side gap, we believe they present a compelling case for growth. Paired with rising financial literacy and digital adoption, these indicators present Nigerian banks an opportunity to expand credit delivery, boost deposit mobilisation, and grow customer bases.
Resilient earnings despite anticipated rate cuts
We anticipate a cumulative 100bps rate cut by the Monetary Policy Committee (MPC) in 2025E. However, we expect these cuts to materialise towards the end of the year. As such, we expect banks to continue to benefit from elevated yields for most of 2025E – (Treasury bills: c. 18.5% | FGN bond: c. 17.0%). To put things in perspective, our sensitivity analysis highlights that a 100bps cut would translate to only an average 64bps decline in yields on average earning assets to 12.7% (2024FY: 13.3%) across our coverage banks, thus highlighting resilience in the expected interest earnings outturn. Meanwhile, we expect a decline in non-interest income in 2025E. All told, we forecast a 5.8% y/y average decline in earnings per share of our coverage names, highlighting the dilutive impact of the additional share issuances. We model an EPS CAGR of 15.0% over the forecast period.
UBA our top pick
UBA stands out as our top pick, presenting a compelling estimated upside of 68.9%. We particularly like the bank’s earnings profile, supported by its diversified operations across markets. UBA generates the highest share of international earnings (51.7%) among Tier-1 peers — a key advantage that offers earnings stability and topline support. Looking ahead, we forecast a 5-year CAGR of 15.8% in core income, supported by its broad geographic footprint and balance sheet scale. Furthermore, non-interest income is expected to grow at a 16.7% CAGR, driven by sustained momentum in fee-based income, underpinned by strong digital capabilities and a solid transaction banking franchise. We forecast a 430bps reduction in the cost-to-income ratio (ex-LLE) to 46.6% in 2025E, supported by improved cost management, which should support the bank’s profitability outlook in 2025E.
