Banking Sector

Nigerian Banks Saw Recovery in Revenue Margins and High Profits in ’22-‘23

Globally and in most of Africa profits are up, thanks to rising interest rates, but financial institutions need to reinvent themselves in the face of major structural and macroeconomic shifts.

Published

7 months ago

October 18, 2023

Temitayo Olukoya

McKinsey & Company published its 2023 Global Banking Annual Review. The analysis unpacks the shifts in balance sheet, transactions, and distribution that have been leaving banks, to go to nontraditional institutions and other parts of the market, a movement McKinsey calls the ‘Great Banking Transition’.

Globally, financial institutions are generating the highest profits in more than a decade, resulting in about $400 trillion in assets and generating $6.8 trillion in revenue in 2022. This upturn arises from the improvement in net interest margins that boosted the sector’s profits by about $280 billion in 2022 and lifted return on equity (ROE) to 12 percent in 2022 and an expected 13 percent in 2023, compared with an average of just 9 percent since 2010.

Africa’s banking sector echoed this performance, generating $22.3 billion in net profits in 2022, with an average growth of about 8 percent annually since 2021. Africa also outperformed the global trend with ROE of 15 percent recorded in 2022 and 16 percent in 2023, with some African banks amongst the most profitable. Higher interest rates across most of the continent ended years-long trend of margin compression.

The banking sector in Nigeria generated more than $2 billion in profits in 2022. ROE is expected to improve to 21 percent this year and may have an ROE slightly higher than cost of equity.

“The oscillating interest rate environment will affect Nigeria’s transition, but exactly how remains to be seen,” says Mayowa Kuyoro, a Partner and Head of McKinsey’s Fintech and Payments practice for East Europe, Middle East, and Africa.

“We may be going through a phase in which a long-term macroeconomic turning point—including a higher-for-longer interest rate scenario and an end to the asset price super cycle—changes the attractiveness of some models that were specifically geared to the old environment, while other structural trends, especially in technology will likely continue.”

Besides overcoming challenges, Nigerian banks have a major opportunity to create value. The analysis lays out possible and not mutually exclusive priorities that could help institutions survive and thrive:

Leverage technology and GenAI capabilities to boost productivity, utilize talent better, and improve the delivery of products and services. This includes capturing the AI opportunity, along with advanced analytics, to deploy process automation, platforms, and ecosystems; operating more like a tech company to scale the delivery of products and services; cultivating a cloud-based, platform-oriented architecture; and improving capabilities to address technology risks. Distinctive technology development and deployment will increasingly become a critical differentiator for banks.
Scaling or transforming transaction businesses. Scale in a market or product is a key to success, but it can be multifaceted: institutions can find a niche in which to go deep, or they can look to cover an entire market. Banks can aggressively pursue economies of scale in their transactions business, including through mergers and acquisitions (which has been a major differentiator between traditional banks and specialists) or by leveraging partners to help with exits.
Leveling up distribution in Go to Market. Sell to customers and advise them directly and indirectly, including through embedded finance and marketplaces and by offering digital and AI-based advisory. An integrated omnichannel approach here could make the most of automation and human interaction, for example. Deciding on a strategy for third-party distribution, which could be via partnerships to create embedded finance opportunities or platform-based models, can create opportunities to serve customer needs, including with products outside the institution’s immediate business models.
Adapting to the next generation E2E risk enablers. Financial institutions everywhere will need to stay on top of the ever-evolving risk environment. In the macroeconomic context, this includes inflation, an unclear growth outlook, and potential credit challenges in specific sectors such as commercial real estate exposure. Other risks are associated with changing regulatory requirements, cyber and fraud, and the integration of advanced analytics and AI into the banking system. To manage these risks, banks could consider elevating the risk function to make it a potential differentiator. For example, in client discussions, product design, and communications they could highlight the bank’s resilience based on its track record of managing systemic risk and liquidity. They could also further strengthen the first line and embed risk in day-to-day activities, including investing in new risk activities driven by the growth of gen AI. Underlying changes in the real economy will continue in unexpected ways, requiring banks to be ever more vigilant.

“Nigerian institutions will need to examine each of their businesses to assess where their competitive advantages lie across and within the three core banking activities—balance sheet, transactions, and distribution—and to what extent they can offer the products in high demand at a time when risk capacity is broadening and many clients and customers are searching for the highest deposit yields,” says Kuyoro.

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Banking Sector

CBN Governor Vows to Tackle High Inflation, Signals Prolonged High Interest Rates

Published

2 days ago

May 14, 2024

Samed Olukoya

Central Bank of Nigeria - Investors King

The Governor of the Central Bank of Nigeria (CBN), Dr. Olayemi Cardoso, has pledged to employ decisive measures, including maintaining high interest rates for as long as necessary.

This announcement comes amidst growing concerns over the country’s soaring inflation rates, which have posed significant economic challenges in recent times.

Speaking in an interview with the Financial Times, Cardoso emphasized the unwavering commitment of the Monetary Policy Committee (MPC) to take whatever steps are essential to rein in inflation.

He underscored the urgency of the situation, stating that there is “every indication” that the MPC is prepared to implement stringent measures to curb the upward trajectory of inflation.

“They will continue to do what has to be done to ensure that inflation comes down,” Cardoso affirmed, highlighting the determination of the CBN to confront the inflationary pressures gripping the economy.

The CBN’s proactive stance on inflation was evident from the outset of the year, with the MPC taking bold steps to tighten monetary policy.

The committee notably raised the benchmark lending rate by 400 basis points during its February meeting, further increasing it to 24.75% in March.

Looking ahead, the next MPC meeting, scheduled for May 20-21, will likely serve as a platform for further deliberations on monetary policy adjustments in response to evolving economic conditions.

Financial analysts have projected continued tightening measures by the MPC in light of stubbornly high inflation rates. Meristem Securities, for instance, anticipates a further uptick in headline inflation for April, underscoring the persistent inflationary pressures facing the economy.

Despite the necessity of maintaining high interest rates to address inflationary concerns, Cardoso acknowledged the potential drawbacks of such measures.

He expressed hope that the prolonged high rates would not dampen investment and production activities in the economy, recognizing the need for a delicate balance in monetary policy decisions.

“Hiking interest rates obviously has had a dampening effect on the foreign exchange market, so that has begun to moderate,” Cardoso remarked, highlighting the multifaceted impacts of monetary policy adjustments.

Addressing recent fluctuations in the value of the naira, Cardoso reassured investors of the central bank’s commitment to market stability.

He emphasized the importance of returning to orthodox monetary policies, signaling a departure from previous unconventional approaches to monetary management.

As the CBN governor charts a course towards stabilizing the economy and combating inflation, his steadfast resolve underscores the gravity of the challenges facing Nigeria’s monetary authorities.

In the face of daunting inflationary pressures, the commitment to decisive action offers a glimmer of hope for achieving stability and sustainable economic growth in the country.

Banking Sector

NDIC Managing Director Reveals: Only 25% of Customers’ Deposits Insured

Published

2 days ago

May 14, 2024

Samed Olukoya

The Managing Director and Chief Executive Officer of the Nigeria Deposit Insurance Corporation (NDIC), Bello Hassan, has revealed that a mere 25% of customers’ deposits are insured by the corporation.

This revelation has sparked concerns about the vulnerability of depositors’ funds and raised questions about the adequacy of regulatory safeguards in Nigeria’s banking sector.

Speaking on the sidelines of the 2024 Sensitisation Seminar for justices of the court of appeal in Lagos, themed ‘Building Strong Depositors Confidence in Banks and Other Financial Institutions through Adjudication,’ Hassan shed light on the limited coverage of deposit insurance for bank customers.

Hassan addressed recent concerns surrounding the hike in deposit insurance coverage and emphasized the need for periodic reviews to ensure adequacy and credibility.

He explained that the decision to increase deposit insurance limits was based on various factors, including the average deposit size, inflation impact, GDP per capita, and exchange rate fluctuations.

Despite the coverage extending to approximately 98% of depositors, Hassan underscored the critical gap between the number of depositors covered and the value of deposits insured.

He stressed that while nearly all depositors are accounted for, only a quarter of the total value of deposits is protected, leaving a significant portion of funds vulnerable to risk.

“The coverage is just 25% of the total value of the deposits,” Hassan affirmed, highlighting the disparity between the number of depositors covered and the actual value of deposits within the banking system.

Moreover, Hassan addressed concerns about moral hazard, emphasizing that the presence of uninsured deposits would incentivize banks to exercise market discipline and mitigate risks associated with reckless behavior.

“The quantum of deposits not covered will enable banks to exercise market discipline and eliminate the issue of moral hazards,” Hassan stated, suggesting that the lack of full coverage serves as a safeguard against irresponsible banking practices.

However, Hassan’s revelations have prompted calls for greater regulatory oversight and transparency within Nigeria’s financial institutions. Critics argue that the current level of deposit insurance falls short of providing adequate protection for depositors, especially in the event of bank failures or financial crises.

The disclosure comes amid ongoing efforts by regulatory authorities to bolster depositor confidence and strengthen the resilience of the banking sector. With concerns mounting over the stability of Nigeria’s financial system, stakeholders are urging for proactive measures to address vulnerabilities and enhance consumer protection.

Banking Sector

Wema Bank Celebrates 79th Anniversary with Launch of CoopHub for Cooperative Societies

Published

3 days ago

May 13, 2024

Samed Olukoya

Wema Bank, one of Nigeria’s leading financial institutions, has introduced a digital solution tailored for cooperative societies.

The innovative platform, named CoopHub, was developed to drive digital transformation and empower communities across Nigeria.

The unveiling of CoopHub took center stage at the bank’s anniversary celebration, held on Friday amidst much anticipation and excitement.

The launch of this pioneering platform underscores Wema Bank’s dedication to innovation and customer-centricity, aiming to revolutionize the operations of cooperative societies and address longstanding challenges within the sector.

At the heart of CoopHub lies a strategic vision to redefine the way cooperative societies function by providing tailored solutions that bridge the gaps inherent in traditional cooperative frameworks.

Designed to streamline operations, enhance communication, and promote financial inclusivity, CoopHub aims to empower cooperative societies and their members for optimal productivity and growth.

Moruf Oseni, the Managing Director/Chief Executive Officer of Wema Bank, emphasized the strategic importance of CoopHub in addressing the pain points faced by cooperative societies.

He highlighted challenges such as manual recordkeeping, limited access to loans, poor communication, insecurity, and other restrictions that CoopHub seeks to overcome. Oseni reaffirmed Wema Bank’s commitment to innovation and customer-centricity, stating that CoopHub represents a significant step forward in empowering communities across Nigeria.

Solomon Ayodele, Wema Bank’s Head of Innovation, elaborated on the transformative features of CoopHub, emphasizing its role in ushering cooperative societies into a new era of efficiency and transparency.

Ayodele highlighted features such as a digitized database for recordkeeping, user management capabilities for leaders, transparent overviews of contributions, seamless communication frameworks, and robust security measures, including a three-factor authentication system for withdrawals.

Ayodele urged cooperative societies to embrace CoopHub and experience the future of cooperative operations firsthand.

He emphasized the platform’s potential to eliminate conflicts, mistrust, and inefficiencies, offering a seamless and secure ecosystem for cooperative members to thrive.

The launch of CoopHub comes at a time when cooperative societies play a vital role in Nigeria’s socio-economic landscape.

According to the National Cooperative Financing Agency of Nigeria, over 30 million Nigerians belong to cooperative societies, highlighting the significant impact of these entities on community development and financial inclusion.

As Wema Bank embarks on its 79th year of operation, the introduction of CoopHub underscores the institution’s commitment to driving positive change and fostering sustainable growth within Nigeria’s cooperative sector.

With its innovative features and transformative capabilities, CoopHub promises to empower cooperative societies, enhance financial inclusivity, and catalyze socio-economic development across Nigeria.