Economic Challenges Pose Strain on Nigerian Banks’ Operating Expenses, Warns Agusto&Co
As inflation and economic pressures continue to rise, Nigeria’s deposit money banks (DMBs) are cautioned to brace for stretched operating expenses, warns renowned pan-African rating agency, Agusto&Co. The agency’s recent report titled “The Nigerian Banking Industry – A Resilient Industry Navigating a Volatile Operating Terrain” emphasizes the challenges faced by banks due to factors such as inflation, currency devaluation, and credit risk.
Agusto&Co’s 2023 Nigerian Banking Industry Report highlights the banking sector’s response to changing dynamics. It notes that the availability of funding for risk asset creation has increased, driven by the normalization of Cash Reserve Ratio (CRR) debits and an improvement in foreign currency liquidity. This situation is expected to fuel interest income and ancillary earnings through treasury activities.
The report acknowledges the banking industry’s net foreign currency asset position, predicting substantial gains resulting from the significant depreciation of the Nigerian naira following the harmonization of exchange windows. Despite these potential gains, the report remains cautious about the impact of inflation on operating expenses.
Agusto & Co. projects a notable increase in the return on equity, expecting it to rise by 520 basis points to 26.8%, reflecting the industry’s resilience. However, the report highlights the vulnerability of the industry to the ongoing economic challenges, particularly the devaluation of the naira, which impacts capitalization.
The banking industry’s capital adequacy ratio is expected to improve to 19.2% by the end of 2023, driven by the ongoing recapitalization efforts by some banks and the planned retention of profits. The report also anticipates changes in the competitive landscape, with banks adopting holding company structures to diversify into new ventures such as pension and asset management, while also addressing challenges posed by FinTech disruptors.
Agusto&Co. emphasizes that the Nigerian banking industry’s financial outlook is positive, but it acknowledges the need for proactive responses to emerging risks resulting from policy reforms. The ability to adapt swiftly to these challenges will ultimately determine the success of banks in navigating the evolving landscape.
Opinion: Agusto&Co.’s report sheds light on the complex environment within which Nigerian banks are operating. The challenges posed by inflation, currency fluctuations, and credit risk highlight the importance of adaptability and strategic planning for these financial institutions. As the banking landscape evolves, the report’s insights into diversification strategies and the embrace of holding company structures underscore the need for banks to explore new avenues for growth and resilience. Navigating these economic uncertainties requires a blend of foresight and nimble decision-making, ultimately defining the industry’s winners and losers in the face of emerging risks.
Tag: @marketnewsng