Agusto & Co. Limited, Nigeria’s largest research house and rating institution recently released its flagship product Banking Sector Report 2021, which is the most recent and comprehensive report on the banking sector in Nigeria based on a review of the financial statements of twenty commercial banks and five investment banks. The report examined the structure of the industry, the financial situation, the regulatory environment in addition to the macroeconomic environment and its impact on the Nigerian banking industry.
According to Agusto & Co’s Bank report, the COVID-19 pandemic has caused an extraordinary test for the global community. Although the global death rate from COVID is low, at around 2.2%, the death toll has fallen from less than 3,000 in December 2019 to around 3.9 million as of June 30, 2021. The death rate in Nigeria was comparatively lower at around 1% on the same date. However, the local economy has had its fair share of adversities related to the pandemic. However, drawing lessons from the economic recession of 2016/2017, the Nigerian banking sector was better prepared in 2020. Proactive measures in the form of a forbearance granted by the Central Bank of Nigeria (CBN), allowed banks to proceed. a temporary and time-limited restructuring of the facilities granted to households and businesses severely affected by COVID-19. Overall, the lending approach has been cautious in the industry given the difficult operating environment. Although gross loans and advances increased by 12%, loan growth was negative when considering the 19.3% devaluation of the naira. Supported by abstention and the proactive measures adopted by the banks, the NPL ratio improved to 6.6% (FY 2019: 7.6%).
The reliability of the business continuity measures was tested in 2020, given the movement restrictions that lasted for months. Most banks have shown resilience through innovative measures, including remote working arrangements and upgrading network infrastructure to support more traffic on digital channels. These arrangements also provided support during the mandatory curfew caused by the civic unrest that followed the #EndSARS protests in October 2020. Indeed, the pandemic has highlighted the crucial role of technology in deepening financial services, with some banks experiencing up to 50% increase in digital banking transaction volumes. However, Agusto & Cie notes that these gains were limited by the reduction in bank fees induced by the CBN, which came into effect in January 2020. As a result, electronic banking revenues decreased by 27.3%, which represents a decrease of 13, 2% (fiscal year 2019: 21.1%) of -Interest income.
CBN policies to lower interest rates have persisted, especially given the urgent need to stimulate the economy in the wake of adversities created by the pandemic. However, given the need to moderate inflation amid efforts to maintain a stable exchange rate, the cash reserve requirement (CRR) was increased and normalized to 27.5% for investment banks. and commercial. The standardized CRR has been implemented alongside discretionary deductions. Agusto & Cie Notes that at the end of fiscal 2020, the industry’s restricted cash reserves exceeded 9.5 trillion yen, resulting in an effective CRR of 37%. It should be noted that Nigeria has the highest reserve requirements in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRRs below 10%. We believe that the high level of CRR moderated the performance and liquidity position of the sector during the year under review. Assuming the sterile CRRs were invested in 5% Treasury securities, 482 billion yen would have been added to the industry’s pre-tax profit. This would have increased the industry’s return on average equity (ROE) from 11% to 31.6% in the fiscal year ended December 31, 2020.
Table 3: Impact of restricted funds (CRR) on the profitability of the banking sector in fiscal year 2020
|Cash reserve requirement||Estimated interest income lost assuming a yield of 5%|
|Zenith Bank Plc||1,370,619,000||68 530 950|
|Access Bank Plc||1,275,279,265||63 763 963|
|First Bank of Nigeria Ltd||1,230,974,871||61 548 744|
|United Bank for Africa Plc||1,072,094,000||53 604 700|
|Guarantee Trust Bank Plc||1 008 748 051||50 437 403|
|Fidelity Bank Plc||540 129,000||27 006 450|
|Ecobank Nigeria Plc||406,043,000||20 302 150|
|Standard Chartered Bank Nigeria Ltd||362 542 981||18 127 149|
|Union Bank of Nigeria Plc||356,452,000||17 822 600|
|Stanbic Bank IBTC SA||368,357,000||18 417 850|
|First City Monument Bank Plc||311 746 155||15,587,308|
|Wema Bank Plc||246 974 959||12,348,748|
|Sterling Bank Plc||228,791,000||11,439,550|
|Citibank Nigeria Ltd||209 236 306||10,461,815|
|Polaris Bank Plc||204,832,000||10,241,600|
|Unity Bank Plc||91 130 360||4,556,518|
|Providus Bank Plc||89 567 141||4,478,357|
|Coronation Merchant Bank Ltd.||72 327 019||3,616,351|
|FBN Merchant Bank SA||39 370 061||1 968 503|
|Nova Merchant Bank Ltd||35 170 012||1,758,501|
|FSDH Merchant Bank Plc||27 061 559||1,353,078|
|Bank Globus SA||25,999,790||1,299,990|
|Rand Merchant Bank Ltd||22 899 811||1,144,991|
|Jaiz Bank SA||22 590 165||1,129,508|
|Titan Trust Bank Ltd||22 521 705||1,126,085|
|9 641 457 211||482,072,860|