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



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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August 2023 Witnesses Highest Revenue Allocation of the Year – N1.1 Trillion Shared

The driving force behind this boost in revenue can be attributed to foreign exchange gains that have contributed significantly to the government’s income stream.



Revenue - Investors King

The Federation Account Allocation Committee (FAAC) unveiled its allocation of N1.1 trillion to the three tiers of government for the month of August 2023, Investors King reports.

This substantial increase was detailed in a communiqué following the committee’s latest meeting. August allocation was the highest so far with an increase of N133.99 billion when compared to the N966.11 billion shared in July 2023.

The driving force behind this boost in revenue can be attributed to foreign exchange gains that have contributed significantly to the government’s income stream.

Breaking down the N1.1 trillion total distributable revenue, the statement reveals that it consists of distributable statutory revenue amounting to N357.4 billion, distributable Value Added Tax revenue totaling N321.94 billion, Electronic Money Transfer Levy revenue at N14.10 billion, Exchange Difference revenue of N229.57 billion, and an augmentation of NN177.09 billion.

Of this impressive sum, the Federal Government is set to receive N431.25 billion, while the State governments will be allocated N361.19 billion, and the local government Councils will obtain N266.54 billion.

However, it’s essential to note that the total revenue available for August stood at N1.48 trillion, marking a 14% or 0.26 trillion decrease from the preceding month’s figure of N1.74 trillion.

The FAAC communiqué further underscores that various deductions were made, including N58.76 billion for the cost of collection, N254.05 billion for total transfers and refunds, and N71 billion allocated to savings. Additionally, the Excess Crude Account maintained a balance of $473,754.57.

The statement elaborated, “Gross statutory revenue of N891.934 billion was received for the month of August 2023. This was lower than the N1,150.424 billion received in July 2023 by N258.490 billion. The gross revenue available from the Value Added Tax was N345.727 billion. This was higher than the N298.789 billion available in July 2023 by N46.938 billion.”

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Zambia’s Finance Minister Faces Dual Challenge in Upcoming Budget Address



Zambian economy

As Zambia’s Finance Minister, Situmbeko Musokotwane, prepares to present the nation’s budget, he finds himself at a pivotal crossroads.

The second-largest copper producer in Africa is grappling with two pressing concerns: debt sustainability and soaring living costs.

Debt Restructuring Dilemma: Musokotwane’s foremost challenge is finalizing the $6.3 billion debt-restructuring deal with official creditors, led by China and France.

Delays have hindered disbursements from the International Monetary Fund (IMF) and left private creditors in limbo.

To reassure investors, a memorandum of understanding with the official creditor committee is urgently needed.

President Hakainde Hichilema emphasizes the importance of sealing these transactions to signal closure on this tumultuous chapter.

Plummeting Tax Revenue: The key copper-mining industry, which accounts for 70% of Zambia’s export earnings, is in turmoil.

First-half mining company taxes and mineral royalty collections have nosedived, adding to economic woes.

This, in turn, has depreciated the local currency, exacerbating imported inflation, particularly in fuel prices.

Rising Food Inflation: Musokotwane faces mounting political pressure to combat soaring living costs, with annual inflation reaching an 18-month high of 12%. Corn meal prices, a staple in Zambia, have surged by a staggering 67% in the past year.

Neighboring countries’ demand for corn has led to smuggling and further price spikes, raising concerns about food security.

Currency Woes: The kwacha’s value has been a barometer for the nation’s economic health. It depreciated by 16% since June 22, the worst performance among African currencies, reflecting the ongoing debt-restructuring uncertainty.

In his budget address, Musokotwane faces the daunting task of striking a balance between debt management, economic stability, and alleviating the burden on Zambia’s citizens.

The international community will keenly watch to see if his fiscal measures can steer the nation toward a path of recovery and prosperity.

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IMF Urges Sub-Saharan African Nations to Eliminate Tax Exemptions for Fiscal Health



IMF global - Investors King

Sub-Saharan African countries have been advised by the International Monetary Fund (IMF) to tackle their fiscal deficits by focusing on eliminating tax exemptions and bolstering domestic revenue rather than resorting to fiscal expenditure cuts, which could hamper economic growth.

The IMF conveyed this recommendation in a paper titled ‘How to avoid a debt crisis in Sub-Saharan Africa.’

The IMF’s paper emphasizes that Sub-Saharan African nations should reconsider their overreliance on expenditure cuts as a primary means of reducing fiscal deficits. Instead, they should place greater emphasis on revenue-generating measures such as eliminating tax exemptions and modernizing tax filing and payment systems.

According to the IMF, mobilizing domestic revenue is a more growth-friendly approach, particularly in countries with low initial tax levels.

The paper highlights success stories in The Gambia, Rwanda, Senegal, and Uganda, where substantial revenue increases were achieved through a combination of revenue administration and tax policy reforms.

The IMF also pointed out that enhancing the participation of women in the labor force could significantly boost Gross Domestic Product (GDP) in developing countries.

The IMF estimates that raising the rate of female labor force participation by 5.9 percentage points, which aligns with the average reduction in the participation gap observed in the top 5% of countries during 2014-19, could potentially increase GDP by approximately 8% in emerging and developing economies.

In a world grappling with the weakest medium-term growth outlook in over three decades, bridging the gender gap in labor force participation emerges as a vital reform that policymakers can implement to stimulate economic revival.

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