How to sustain banking stocks’ rally for enhanced returns

Sector gains N732 billion
Capital market analysts have identified the banking industry as one of the most vibrant sectors in the Nigerian economy, as stocks returned a gain of about N732billion in the first month of the 2018 financial year.

They believed that investors are taking position on banks due to good fundamentals, in order to benefit from expected dividend they may declare as the economy improves gradually.

However, they described the sector as the most delicate, as it has the capacity to send shock waves round the economy if it fails.

Therefore, they stressed the need for appropriate measures to be taken in order to ensure that the myriads of problems faced by Nigerian banks, which affect their effectiveness and productivity are addressed to sustain current stocks rally on the exchange.

Specifically, the Managing Director, Capital Bancorp Plc, Aigboje Higo, in an interactive session on the company’s economic review and outlook for 2018, in Lagos, noted that despite the sector’s potential, it has continued to suffer significant headwinds since 2005, due to harsh monetary policies and economic realities.

According to him, these macro-economic realities have continued to hamper banks’ ability to significantly grow profits.

He however explained that most of the Tier-1 banks have been able to surmount these headwinds, and have continued to surpass expectations even in the face of the unfriendly business environment and hostile business policies.

“2017 saw the banking sector continue to post bumper earnings especially for most of the Tier-1 banks and a few Tier-2 banks. The rest of the group has continued to battle with high level of loan impairment, which has eaten deep into their operating profit and dampened their ability to grow bottom line.

“Non-Performing loans as at June 2016 stood at 11.7 per cent, and rose to 12.8 as at December 2016, with a large portion of the rise attributed to the banks in the Tier-2 space. CBN may need to increase its oversight of the credit and approval process of the tie-2 banks in a bid to limit the rising NPLs.

“The banks in 2017 are also expected to report higher interest income on the back of the high interest rate environment observed during the period, while we expect an increase in cost to income ratio for the period.”

Furthermore, Higo noted that the banking sector is expected to remain robust and continue to return profits into 2018, but added that the implementation of IFRS 9 may increase banks’ impairment charges.

“With the implementation of IFRS 9, which require banks to recognise impairment sooner, and estimate lifetime expected losses against a wider spectrum of assets, expected to take effect from 2018, there are expectations of prompt increase in banks impairment charge. This will reduce their profitability going forward, but make banks stronger and less exposed to risk of impairment shocks.”

He added that despite the reduction in interest rates, which is expected to increase banks’ lending to the real sector of the economy, the implementation of IFRS 9 may affect some of the banks through aggressive rise in loan advances. This would give rise to increased provisioning, which may affect the bank’s capital buffers in the immediate.

“All in all, the banks are expected to have a decent outing during the Year 2018, with less shocks expected in the sector.”

The Chief Research Officer of Investdata Consulting, Ambrose Omodion, listed the challenges faced by Nigerian banks to include: weak capital base of some banks, poor corporate governance adherence, non-performing credits and insolvency, lack of modern innovations to create wealth for the banks among others.

He explained that if banks could avoid these pitfalls and create an effective platform to explore the possibilities in the huge number of minor savers in Nigeria, and invest in the budding sectors of economy such as agriculture, real estate, transportation and haulage, healthcare, cargo aircrafts, investment in Nigerian banking sector holds huge potential.