Having posted generally impressive results in the first half of the year despite Q1 data showing that the economy was still in recession at the time, Nigerian banks are likely to sustain this performance in H2 2017 due to the improving macro environment and latest positive Gross Domestic Product (GDP) figures, analysts at FBNQuest Research have predicted.
In a note obtained by New Telegraph, the experts stated: “The recession of 2016 and the devaluation of the naira have led to a heightened risk environment for the banking sector. Loan growth for our universe averaged -1per cent between December and June 2017. Contributing to the loan growth decline is a crowding-out effect as government bond yields have stayed elevated.
” Besides, the analysts stated: “The macro environment is stable to improving, with the recession behind us. We expect oil prices to be stable, and provide support to the naira (boosting liquidity in the fx market in the process). We forecast GDP to grow 1.6per cent in 2017E, compared with -1.6per cent in 2016. Although the banks face reinvestment risk in their fixed income portfolios given the recent movement in yields, we believe they are adept enough to continue to grow their revenue as the last two years have shown.
” In addition, the analysts pointed out that lenders have been able to keep asset quality risks under control with the Non-Performing Loan (NPL ratio) of lenders in their universe averaging 5.4per cent in Q2 2017. According to them, while restructurings have helped to curb the NPLs, the Central Bank of Nigeria (CBN), “deserves some credit for strengthening banks’ risk management processes after the last crisis.
” They emphasised that while they expect some deterioration in asset quality in H2, it would not be, “a doomsday scenario. “We forecast a year-end average NPL ratio of 6.1per cent, with all except Diamond Bank (12per cent) reporting ratios in the mid-single digit range. Tier 2 banks Diamond and FCMB face the highest risk from asset quality deterioration given that their capital ratios are the lowest in the group – 15.4per cent and 17.3per cent respectively,” the analysts said.
However, the FBNQuest experts predicted that Return On Average Equity (ROAE) will decline to 17.3per cent from an average of 18.6per cent in 2016, due to base effects, They pointed out that fx-related gains would not be as significant this year as they were in 2016. Specifically, they stated : “Our 2018E average ROAE forecast is 16.5per cent. GT Bank and Stanbic are forecast to deliver ROAEs well above the sector-average, in the 27-35per cent range over the next two years.
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