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The Nigerian Banking Industry – A Resilient Industry Navigating a Volatile Operating Terrain – AGUSTO & CO

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Trade - Investors King

Agusto & Co. Limited, the pan-African credit rating agency and the foremost business information provider has released its 2023 Nigerian Banking Industry Report. The 2023 edition of the annual report provides a comprehensive review of Nigeria’s banking industry (“the Industry”) and the near-term expectations and outlook for the Industry.

The Nigerian banking industry has continued to be resilient despite the raging macroeconomic and regulatory headwinds that have constrained performance in the last three years. Innovation and malleability of the banks as reflected in the transition to the financial holding company structure and upscale of banking license by some players have upheld the Industry.

Collaborations with financial technology companies (FinTechs), domestic and international development finance institutions (DFIs), among other partnerships have also supported the Nigerian banking industry.

Agusto & Co. notes that the Industry’s loan book rose by 27% in FY 2022, spurred by increased activities at the differentiated cash reserve requirement (D-CRR) window, higher deposit base and naira devaluation.

Banks have backed this growth with additional investment in credit risk management and capital raising exercises. Following the inauguration of President Tinubu, the new administration has implemented several reforms aimed at reversing prevailing macroeconomic imbalances.

Agusto & Co. believes that the reforms including the removal of the petrol subsidy, exchange rate harmonisation, tax reforms and restoration of a methodological framework for calculating the cash reserve requirements (CRR) provide growth opportunities for the Industry.

For instance, we believe many banks will take advantage of rising liquidity following the eradication of arbitrary CRR debits to grow the loan book, especially since the working capital needs of businesses continue to rise given the weakening domestic currency and other inflationary pressures.

Agusto & Co expects that new loan disbursements will largely flow to traditional sectors including manufacturing, oil and gas and general commerce amongst others and resilient players given the volatile operating terrain. Nascent sectors such as renewable energy, health and gender-based businesses will also continue to gain according to Agusto & Co.

Nevertheless, some pressures in asset quality are expected, considering the lower consumer purchasing power and dwindling margins of some industries. However, the non-performing loan ratio of the Industry is expected to remain below 5% as at FYE 2023 as many banks leverage their past experiences from recessions and the pandemic to navigate this stressed cycle.

Agusto & Co.’s expectation for performance by the Nigerian banking industry is positive. With the reversal to normalcy with respect to CRR debits and foreign currency illiquidity, many banks have witnessed a rise in available funding for risk asset creation and we believe this would be exploited to boost interest income and ancillary earnings through the treasury function.

Given the Industry’s net foreign currency asset position, Agusto & Co. believes the banking industry is also poised to benefit significantly from the massive naira depreciation that followed the move to harmonise the various exchange windows, reporting significant foreign exchange gains. Overall, Agusto & Co. anticipates a 520 basis points increase in the return on equity to 26.8%.

However, the Industry is not entirely insulated from the vagaries of the Nigerian economy and we expect inflationary pressures to bloat operating expenses in the near term.

The persistent naira devaluation and heightened credit risk environment have adversely impacted the Industry’s capitalisation position. Agusto & Co. expect these pressures to be accentuated by the ongoing macroeconomic reforms, particularly the naira devaluation.

However, the ongoing recapitalisation exercise by some banks as well as the planned retention of profits will moderate the impact. Agusto & Co. notes the initiatives by banks with negative equity to resolve the challenge before December 2023. As a result, we expect the Industry’s capital adequacy ratio to improve to 19.2% as at FYE 2023.

As the competitive landscape is changing the holding company structure is gaining more prominence with banks seeking to diversify into new businesses such as pension and asset management while responding to the disruption by FinTech companies. We expect more banks to go the HoldCo route as the competitive landscape changes. Similarly, environmental and social considerations are also expected to be more prominent in the near term.

Overall, Agusto & Co.’s financial projection for the Nigerian banking industry is generally positive, however, we recognise that the Industry will face emerging risks from policy reforms and the ability to respond swiftly will determine the winners and the losers.

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Economy

Nigeria’s Growth Forecast Lowered to 3% for 2025, Higher than Most Emerging Markets

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IMF global - Investors King

The International Monetary Fund (IMF) has projected a 3% growth rate for Nigeria in 2025, slightly down from the 3.1% forecasted for 2024.

Despite this slight decline, Nigeria’s projected growth remains higher than that of many emerging markets as detailed in the IMF’s latest World Economic Outlook released on Tuesday.

In comparison, South Africa’s economy is expected to grow by 1.2% in 2025, up from 0.9% this year. Brazil’s growth is projected at 2.4% from 2.1% in 2024, and Mexico’s growth forecast stands at 1.6% for 2025, down from 2.2% in 2024.

However, India is anticipated to see a robust growth of 6.5% in 2025, although this is slightly lower than the 7% forecast for 2024.

The IMF’s projections come as Nigeria undertakes significant monetary reforms. The Central Bank of Nigeria has been working on clearing the foreign exchange backlog, and the federal government recently removed petrol subsidies.

These reforms aim to stabilize the economy, but the country continues to grapple with high inflation and increasing poverty levels, which pose challenges to sustained economic growth.

Sub-Saharan Africa as a whole is expected to see an improvement in growth, with projections of 4.1% in 2025, up from 3.7% in 2024. This regional outlook indicates a modest recovery as economies adjust to global economic conditions.

The IMF report underscores the need for cautious monetary policy. It recommends that central banks in emerging markets avoid easing their monetary stances too early to manage inflation risks and sustain economic growth.

In cases where inflation risks have materialized, central banks are advised to remain open to further tightening of monetary policy.

“Central banks should refrain from easing too early and should be prepared for further tightening if necessary,” the report stated. “Where inflation data encouragingly signal a durable return to price stability, monetary policy easing should proceed gradually to allow for necessary fiscal consolidation.”

The IMF also highlighted the importance of avoiding fiscal slippages, noting that fiscal policies may need to be significantly tighter than previously anticipated in some countries to ensure economic stability.

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Economy

Nigeria’s Inflation Rises to 34.19% in June Amid Rising Costs

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Food Inflation - Investors King

Nigeria’s headline inflation rate surged to 34.19% in June 2024, a significant increase from the 33.95% recorded in May.

This rise highlights the continuing pressures on the nation’s economy as the cost of living continues to climb.

On a year-on-year basis, the June 2024 inflation rate was 11.40 percentage points higher than the 22.79% recorded in June 2023.

This substantial increase shows the persistent challenges faced by consumers and businesses alike in coping with escalating prices.

The month-on-month inflation rate for June 2024 was 2.31%, slightly up from 2.14% in May 2024. This indicates that the pace at which prices are rising continues to accelerate, compounding the economic strain on households and enterprises.

A closer examination of the divisional contributions to the inflation index reveals that food and non-alcoholic beverages were the primary drivers, contributing 17.71% to the year-on-year increase.

Housing, water, electricity, gas, and other fuels followed, adding 5.72% to the inflationary pressures.

Other significant contributors included clothing and footwear (2.62%), transport (2.23%), and furnishings, household equipment, and maintenance (1.72%).

Sectors such as education, health, and miscellaneous goods and services also played notable roles, contributing 1.35%, 1.03%, and 0.57% respectively.

The rural and urban inflation rates also exhibited marked increases. Urban inflation reached 36.55% in June 2024, a rise of 12.23 percentage points from the 24.33% recorded in June 2023.

On a month-on-month basis, urban inflation was 2.46% in June, slightly higher than the 2.35% in May 2024. The twelve-month average for urban inflation stood at 32.08%, up 9.70 percentage points from June 2023’s 22.38%.

Rural inflation was similarly impacted, with a year-on-year rate of 32.09% in June 2024, an increase of 10.71 percentage points from June 2023’s 21.37%.

The month-on-month rural inflation rate rose to 2.17% in June, up from 1.94% in May 2024. The twelve-month average for rural inflation reached 28.15%, compared to 20.76% in June 2023.

The rising inflation rates pose significant challenges for the Central Bank of Nigeria (CBN) as it grapples with balancing monetary policy to rein in inflation while supporting economic growth.

The ongoing pressures from high food prices and energy costs necessitate urgent policy interventions to stabilize the economy and protect the purchasing power of Nigerians.

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Economy

Inflation to Climb Again in June, but at a Reduced Pace, Predicts Meristem

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Nigeria's Inflation Rate - Investors King

As Nigeria awaits the release of the National Bureau of Statistics’ report on June 2024 inflation, economic analysts project that while inflation will continue its upward trajectory, the pace of increase will moderate.

This comes after inflation rose to a 28-year high of 33.95% in May, up from 33.69% in April.

Meristem, a leading financial services company, has forecasted that June’s headline inflation will rise to 34.01%, a slight increase from May’s figure.

The firm attributes this persistent inflationary pressure to ongoing structural challenges in agriculture, high transportation costs, and the continuous depreciation of the naira.

Experts have highlighted several factors contributing to the inflationary trend. Insecurity in food-producing regions and high transportation costs have disrupted supply chains, while the depreciation of the naira has increased importation costs.

In May, food inflation grew at a slower pace, reaching 40.66%, but challenges in the agricultural sector, such as the infestation of tomato leaves, have led to higher prices for staples like tomatoes and yams.

Meristem predicts that food inflation will persist in June, driven by these lingering challenges. Increased demand during the Eid-el-Kabir celebration and rising importation costs are also expected to keep food prices elevated.

Core inflation, which excludes volatile items like food and energy, was at 27.04% in May. Meristem projects it to rise to 27.30% in June.

The firm notes that higher transportation costs and the depreciation of the naira will continue to push core inflation up.

However, they also anticipate a month-on-month moderation in the core index due to a relatively stable naira exchange rate during June, compared to a more significant depreciation in May.

Cowry Assets Management Limited has projected an even higher headline inflation figure of 34.25% for June, citing similar concerns.

The firm notes that over the past year, food prices in Nigeria have soared due to supply chain disruptions, currency depreciation, and climate change impacts on agriculture.

This has made basic staples increasingly unaffordable for many Nigerians, stretching household budgets.

As inflation continues to rise, analysts believe the Central Bank of Nigeria (CBN) will likely hike the benchmark lending rate again.

The CBN’s Monetary Policy Committee (MPC) has raised the Monetary Policy Rate (MPR) by 650 basis points this year, bringing it to 26.25% as of May 2024.

At a recent BusinessDay CEO Forum, CBN Governor Dr. Olayemi Cardoso emphasized the MPC’s commitment to tackling inflation, stating that while the country needs growth, controlling inflation is paramount.

“The MPC is not oblivious to the fact that the country does need growth. If these hikes hadn’t been done at the time, the naira would have almost tipped over, so it helped to stabilize the naira. Interest rates are not set by the CBN governor but by the MPC committee composed of independent-minded people. These are people not given to emotion but to data. The MPC clarified that the major issue is taming inflation, and they would do what is necessary to tame it,” Cardoso said.

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