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Nigeria’s GDP grew 1.9% in Q4.
Nigeria’s GDP grew 1.9% in Q4.

Nigerian Lenders Profit as Economy Recovers

Nigerian Lenders Profit as Economy Recovers

Nigerian banks are seen benefitting from improvement in bad loans. The spring in the step of Nigeria’s economy is likely to show up in the results of the country’s banks when they start reporting 2017 earnings from this month.

An improvement in unpaid loans, higher interest income from holding government debt and a rise in profit will have helped lenders bolster their capital buffers, according to Renaissance Capital analysts, AllAfrica reported.

The gross domestic product of Africa’s largest oil producer expanded for three straight quarters last year after a 1.6% contraction in 2016, with year-on-year growth reaching 1.9% in the final three months of 2017. An increase in crude prices and the introduction of a new foreign-exchange system that ended a crippling shortage of dollars helped attract more investment flows into the country, while improving liquidity for the nation’s lenders.

The following are some of the major drivers and points of interest that investors will keep an eye on as they assess the outlook for banks.

Yield Benefit: Record high interest rates of 14% since July 2016 means there is no shortage of yield for banks, many of which parked their funds to profit from the safety of treasury bills and other fixed-income securities rather than lending, where there is more risk.

A drop in those yields from record highs in August means that 2018 will be more challenging for lenders, despite the positive macro backdrop, according to the analysts. Volatility in foreign-exchange related gains, limited scope for cost efficiencies and rising political risks before elections in early 2019 also cloud the outlook for this year, the RenCap analysts said.

Lending: Banks will be able to close the revenue gap created by declining interest rates by lending more into a strengthening economy, according to Stanbic IBTC Holdings Plc analyst Muyiwa Oni. Some banks may boost loan growth to 15% this year compared with 10% in 2017, he said.

“Credit growth will be a big driver” in 2018, Oni said. While lower rates may reduce the cost of funding for banks, net interest margins may still narrow by anything from 100 basis points to 200 basis points this year, he said.

Capital Challenges: At least three small- to medium-sized banks will run into difficulties with their capital levels this year and will need to raise cash, said Robert Omotunde, the head of investment research at Afrinvest West Africa Ltd., without naming the lenders. “A lot of tier two banks have issues with NPLs and it is eating into their capital buffers.”

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