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Report
Zedcrest: Nigerian banks to maintain strong profitability
Guardian Nigeria
Follow
1/8/2025
Category
🗞
News
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00:00
Nigerian banks delivered triple-digit profits growth in 2024, but can we expect the momentum
00:06
to be sustained this year?
00:08
Analysts at Zcrest Wealth believe so.
00:10
They say that a robust interest income, digital transformation and a sustained elevated interest
00:14
rate will be the key drivers.
00:16
They also note that the recapitalization drive will enhance banking profits.
00:21
We have Bemini Shukweju.
00:22
She's an investment analyst at Zcrest Wealth.
00:24
She joins me now to share their outlook on the sector.
00:27
Thank you so much for your time today, Bemini.
00:28
And I'd like you to speak to what we saw play out last year in terms of the performance
00:32
we saw with the banks.
00:36
Thank you for inviting me, Ken.
00:37
So basically last year, what we saw was that at the beginning of the year, the banks were
00:41
doing extraordinarily well.
00:42
Like in Q1, we saw that the banks had returned about 40% in year-to-date returns, but all
00:49
of that was like quickly like taken away.
00:51
You know, when we saw the banking recapitalization activity come up as well as the 70% windfall
00:56
tax on these banks actually like evaded investor appetite in this particular banking stock.
01:02
So yes, the index of the banks just quickly went down into a negative position.
01:06
And we saw that actually like remain because it was there up until like August, November,
01:14
where we actually started seeing these banks return back into the positive region, obviously
01:17
due to the fact that like you have said, the banks kept on returning steady income, steady
01:23
profit at a tax.
01:24
So it was a triple-digit product at a tax almost across all the banks, and that actually
01:29
like increased investor appetite into these banking sector stocks.
01:34
So that actually improved these banks' performances across board.
01:38
So we saw that fuel signs at the end of the year, where the banks closed about 15% year-to-date
01:44
as a sector, as a sector, yeah.
01:47
So basically last year was like a mixed year for the banks, where it started off really
01:51
good, middle of the year was shaky, the end of the year continued picking up due to the
01:55
fact that the banks kept on returning triple-digit profit at a tax.
02:00
All right, let's get your outlook.
02:01
I see that you're quite optimistic on performance for this year.
02:04
Sorry?
02:05
I'd like to get your outlook.
02:07
I see that you're quite optimistic for this year.
02:09
Okay, yes.
02:10
So like I said before, last year we saw that the banks were actually returning these very
02:16
high levels of profit, and we actually expect that to kind of persist coming into this year
02:20
because if you look at the profits, we see that the banks are actually, I mean, the core
02:25
banking mandate or the core revenue mandate for banks usually lie in like lending and
02:29
interest income, which actually takes up about 70% of, you know, like these banks' bottom
02:34
line.
02:35
But we are beginning to see them diversify, like we said.
02:38
So we anticipate more digital transformation, which will actually boost their non-interest
02:42
income line, which we have actually seen become resilient.
02:45
So our outlook for this year for banks is actually one of, like, sustained growth.
02:50
We expect the banks to sustain growth across their non-interest income channel as well
02:55
as their interest income channel, given the fact that we are still in a period of elevated
02:58
rates, and these banks have actually bought bonds, treasuries, and different government
03:03
securities.
03:04
You know, banks are beginning to move more into government securities, and they are locking
03:09
in these high rates.
03:11
So basically, we are seeing, like, a little bit less, like, risk in the banks, given the
03:15
fact that they are going more into government securities.
03:18
So that's actually going to help bank profitability in this year.
03:21
Yeah, it's a good thing you mentioned the word risk there, because I'd like to look
03:25
next at the concerns that you could see down the line for profitability for the banks.
03:29
Okay, so honestly, as of right now, the risk, the returns actually outweigh the risk.
03:38
I think the only risk I see is on the recapitalization end for the Tier 2 banks.
03:42
A lot, like, Tier 1 banks, like, Aktiv, and higher Tier 2s, like FCM, we have actually
03:46
finished their capital raising activity.
03:49
So most of the risk is now looking at, okay, what are these other Tier 2 banks going to
03:53
do in terms of, like, capital raising?
03:55
How are they going to raise the required capital for the CBN, required capital for their capital
04:02
recapitalization?
04:03
And how are they going to, like, shore up their capital expenses?
04:05
I think those are the only risks I personally see right now for them, but minus that, as
04:10
the banks are tilting more towards government securities and shoring up their assets, I
04:17
still see, like, the profitability actually, like, being sustained.
04:20
Yeah, but in terms of the tailwinds, things that could move the sector forward, is it
04:25
going to be more of the same as what we saw last year?
04:26
Are we going to see some new entrants coming there?
04:28
Because I was talking to my analyst earlier today and talking about the possibility of
04:32
a stronger Naira.
04:35
Okay.
04:36
So in terms of – in terms of – I think you mean FX devaluation.
04:42
We haven't – sorry?
04:43
Yeah, you can continue.
04:46
We haven't – okay, yeah.
04:47
We haven't seen that affect as much as we saw in 2023.
04:50
So that has actually gradually reduced.
04:53
We actually – in our outlook reports, we actually anticipate a stronger Naira, where
04:56
the Naira should be trading at about 1.4, 1.5 at the end of the year.
05:01
So we actually do anticipate a stronger Naira as well at Zcrest.
05:04
But what we see – what we do see is that the banks are not going to be very negatively
05:09
affected due to the fact that at the beginning of the year, last year, they were actually
05:13
asked to close all their long-term FX positions.
05:17
So banks are now not really sustaining themselves on FX devaluation gains.
05:23
They are now more sustaining themselves on non-interest income and also interest income
05:27
elevation.
05:28
Yeah, but let's look at the policy environment and how key that was – how key would that
05:32
be in terms of driving profitability for the bank going forward?
05:36
Sorry?
05:37
The policy environment, the monetary policy environment.
05:39
Okay, okay.
05:40
The monetary policy environment.
05:41
Basically, for now, like we all know, we are currently in like the highest policy environment
05:47
we've ever seen.
05:48
So NPR is currently at 27.50.
05:52
And as of when we wrote that report, NPR was at 27.25, but obviously, we saw like one last
05:58
terminal hike at the end of the year.
06:01
So basically, what we expect is that coming into this year, we expect interest rates to
06:07
actually moderate.
06:08
This year is kind of like a year of moderation, moving from a higher base of inflation to
06:11
actually lower base.
06:12
We expect interest rates to moderate.
06:13
And that will actually spur, like maybe in Q3, the MPC to actually like reduce interest
06:20
rates.
06:21
And this will actually spur like the banks, you know, but they have locked in their assets
06:25
at like higher rates.
06:27
But then again, this will actually spur the banks to actually like, you know, begin to
06:30
lend more to all these consumer goods companies that actually like now, it's more favourable
06:37
for them to actually take money or take loans from the bank.
06:41
So it affects you to actually spur their income as well.
06:44
All right.
06:45
Thank you so much for your time today.
06:46
Good to meet you.
06:47
I've got you there.
06:48
She's an investment analyst at Z-Crest Wealth.
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