Agusto&Co warns of rising operating expenses for banks
The Nigerian banking industry is facing a volatile operating environment as the country recovers from the impact of the COVID-19 pandemic. According to a report by Agusto&Co, a pan-African rating agency, the banks are expected to see their operating expenses or cost of operations stretched by soaring inflation and other economic factors. The report, titled “The Nigerian Banking Industry – A Resilient Industry Navigating a Volatile Operating Terrain”, was released on Monday, August 30, 2023.
The report stated that the banks have witnessed a rise in available funding for risk asset creation due to the reversal to normalcy with respect to cash reserve ratio (CRR) debits and foreign currency illiquidity. This would be exploited to boost interest income and ancillary earnings through the treasury function. The report also noted that the banks are poised to benefit significantly from the massive naira depreciation that followed the move to harmonise the various exchange windows, reporting substantial foreign exchange gains.
However, the report warned that the industry is not entirely insulated from the vagaries of the Nigerian economy and inflationary pressures are likely to bloat operating expenses in the near term. The report said, “Overall, Agusto & Co. anticipates a 520 basis points increase in the return on equity to 26.8 per cent.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”.
Inflation hits 17.38 per cent in July
According to the latest data from the National Bureau of Statistics (NBS), Nigeria’s inflation rate rose to 17.38 per cent in July 2023, up from 17.33 per cent in June. This is the third consecutive month of increase after 19 consecutive months of decline. The NBS attributed the rise in inflation to increases in prices of food, transport, housing, water, electricity, gas and other fuels.
The food inflation rate rose to 21.03 per cent in July, up from 20.81 per cent in June. The NBS said this was caused by increases in prices of bread and cereals, milk, cheese and eggs, oils and fats, potatoes, yam and other tubers, meat, fish and fruits. The core inflation rate, which excludes volatile food and energy prices, rose to 13.72 per cent in July, up from 13.09 per cent in June. The NBS said this was due to increases in prices of clothing and footwear, furniture and household equipment, health, transport and education.
The rise in inflation has eroded the purchasing power of Nigerians and increased the cost of living. It has also affected the profitability of businesses, especially those that rely on imported inputs or have high operating costs. The Central Bank of Nigeria (CBN) has maintained a tight monetary policy stance to curb inflation and support the naira exchange rate. However, some analysts have called for a more flexible exchange rate regime and structural reforms to address the underlying causes of inflation.
Banks seek diversification and recapitalisation amid challenges
The Nigerian banking industry is undergoing a transformation as banks seek to diversify their sources of income and strengthen their capital base amid the challenging economic conditions. Some banks have adopted a holding company (HoldCo) structure to enable them to venture into new businesses such as pension and asset management while responding to the disruption by fintech companies. Agusto&Co said that they expect more banks to go the HoldCo route as the competitive landscape changes.
The report also said that some banks are facing negative equity due to persistent naira devaluation and heightened credit risk environment. These banks are expected to resolve their capital adequacy issues before December 2023 through recapitalisation or mergers and acquisitions. The report projected that the industry’s capital adequacy ratio would improve to 19.2 per cent by the end of 2023 as a result of these initiatives.
Agusto&Co said that despite the emerging risks from policy reforms and macroeconomic uncertainties, the Nigerian banking industry is generally positive and resilient. The report said, “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”.
