Published On: Tue, Jul 23rd, 2013

Afrinvest hinges future of Nigerian banking space on retail, SMEs

The future of Nigerian banking space will rest on ancillary banking services such as merchant banking and primary mortgage institutions (PMIs), as well as retail and SME banking, said Afrinvest Securities Limited in its special report on Nigerian Banking Sector 2013.

In the report, the research analysts noted that banks need to develop and grow the depth of their core retail banking business to retain and amplify cheap deposits.

Also, they noted in the report that banks need to expand their geographic footprint and business scope as urbanisation gradually remodels cities and sub-urban areas.

“Mid-tier banks will need to consolidate and integrate vertically in order to compete with tier-1 banks as economies of scale and scope increasingly become differentiating success factors”, the report said.

Afrinvest researchers believe that the banking industry is now confronted with the reality of declining fee incomes, mobile money and dollar denominated capital sourcing.

“The era of ‘real banking’ appears to be gradually re-emerging as traditional sources of high income/profitability continue to come under threat from increased competition and tighter regulation. On a balance of options, we expect a blend of the following service models to characterise the Nigerian banking space within the next 5 years: Outlook on yields and fee income remain downwards, necessitating the need for banks to focus on lending to the real sector,” the analysts said in the report.

According to Afrinvest analysts, “In 2012, Nigerian banks management faced the challenge of trying to beat high earnings expectations which encouraged them to leverage on the high yield environment and increase exposure to fixed income securities in order to maximise tax free returns. We expect this ‘treasury focused’ investment strategy to moderate in 2013 as outlook on yields and fee income decline. Tier-1 banks account for 68 percent of the N21.3 trillion of industry assets, with First Bank alone racking up a N3.2 trillion asset base (or 15percent of industry assets).”

The report stated: “A look at banks profitability in 2012 shows a clear separation of the boys from the men as all tier-1 banks recorded gross earnings in excess of N200 billion compared to tier-2 banks’ N102.0 billion average. Our DuPont analysis of banks 2012 return-on-equity (ROE) also revealed that most tier-1 banks’ impressive earnings resulted from high profit margin whereas tier-2 banks depend more on asset turnover to grow earnings.”

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