Proposed Recapitalization: Experts Bullish On Nigerian Banking Sector

The banking sector has achieved an impressive full-year 2023 growth of 114.89%, on the NGX banking index reflecting investor confidence and heightened interest in banking stocks.

This is despite that the fact that the Nigerian banking industry is still grappling with macroeconomic challenges like a weak business environment, limiting opportunities for growth, inflation, and regulatory policies.

Tier-1 banks emerged as standout performers, as most of them are currently reporting above N1 trillion in market capitalization.

They have also capitalized on foreign exchange gains resulting from asset revaluation, largely influenced by Nigeria’s FX transaction dynamics.

Additionally, the banks have seen a significant increase in their net interest income as a result of the hike in the monetary policy rate (MPR).

According to data from the Nigerian Exchange Limited tracked by Nairametrics, the NGX banking index also recorded substantial gains, with an increase of 114.89% or 479.7 basis points.

It wrapped up the trading year at 897.20 index points, a notable climb from the initial figure of 417.50 it opened in January 2023.

Further checks showed that it has already gained 15.77% or 141.52 points this current year from 897.20 points it opened trading on January 2, 2024, to 1038.72 points it closed on January 19th.

Historically, the banking sector has always been one of the sectors that benefit from an inflation and rate hike environment.

So, market experts believe that from a macro standpoint, things are set for the better in the sector.

According to the expectation of market analysts, despite the unstable policies, the current growth of the index showed that the sector points to sustaining its growth trajectory following positive sentiment by investors.

They added that the banking industry will continue to thrive in the interest rate hike environment, proposed recapitalization, and the windfall from the floating of the Naira.

Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, predicts strong performance for the Nigerian banking sector in 2024.

In an exclusive interview with Nairametrics, Amolegbe highlighted two key factors driving his optimism: rising interest rates and increasing non-interest income.

“The current tight monetary policy environment presents a favourable scenario for banks,” Amolegbe explained. “Widening net interest margins, as borrowing costs rise, are expected to boost profitability across the sector”.

Beyond traditional lending, Amolegbe sees significant potential in diversified revenue streams.

“The expanding adoption of e-channels creates opportunities for fee-based income through digital transactions and other related services,” he noted.

Additionally, Amolegbe anticipates potential revaluation gains on existing assets, further contributing to non-interest income growth.

While recognizing the challenging economic conditions, Amolegbe believes the aforementioned factors suggest “a positive outlook for the Nigerian banking sector in 2024.”

He expects strong financial performance throughout the year, fueled by a combination of rising interest rates and innovative non-interest income strategies.

Also, in an interview with Nairametrics, Executive Vice Chairman of Hicap Securities Limited, Mr David Adonri, offered his perspectives on the potential impact of the Central Bank of Nigeria’s (CBN) proposed bank recapitalization exercise and the recent naira devaluation on the banking sector.

Adonri believes the proposed recapitalization exercise could galvanize activities within the banking sector.

He noted that the need to meet the new capital requirements may prompt banks to engage in mergers and acquisitions, strategic partnerships, or even initial public offerings (IPOs).

This increased dynamism could benefit the sector as a whole.

Furthermore, Mr Adonri sees the naira devaluation as a potential source of extraordinary windfall gains for banks.

“The resulting revaluation of foreign currency-denominated assets could significantly boost their profitability in the short term. This improved outlook might attract increased investor interest in the sector, further stimulating growth,” he said.

Analyst and Head of Research at FSL Securities Limited, Mr. Victor Chiazor projects a largely positive outlook for the Nigerian banking sector in 2024, with sustained investor interest.

In an interview, he highlighted key factors driving this optimism, along with potential risks to consider.

Mr Chiazor anticipates continued positive earnings momentum for the banking sector in the new year.

He cites robust non-interest income streams, potentially arising from the proposed bank recapitalization exercise, as a contributing factor.

“This, along with continued economic growth, is expected to maintain attractive returns for investors,” he said.

The impending bank recapitalization is seen as a potential driver of activity within the sector. The need to meet the new capital requirements could stimulate mergers and acquisitions, strategic partnerships, or even initial public offerings (IPOs). This increased dynamism could further enhance investor interest,” he said.

However, Mr Chiazor cautions against undue optimism and warns of potential challenges in the second quarter of 2024.

He expresses concern that the favourable revaluation gains observed in the first half of 2023, likely due to the naira devaluation, might not be sustainable.

“This could potentially moderate earnings growth and cause a temporary dip in investor sentiment,” he said.

The Managing Director of Crane Securities Limited, Mr. Mike Eze In an exclusive conversation with Nairametrics, noted the recent dynamics in the market, particularly the notable rally in bank stocks during the past few weeks, resulting in some banks surpassing the N1 trillion mark in capitalization.

Eze highlighted that some tier-two banks are actively working towards achieving N1 trillion in share capital, even as the sector awaits the official commencement of the recapitalization process.

He anticipates the listing of unquoted banks such as Polaris, Globus, and Providus on the exchange shortly.

According to Eze, the banking sector is poised for heightened activity, with the bullish run expected to persist.

However, he acknowledged a potential decrease due to profit-taking activities in the first quarter. Eze mentioned that the sector is eagerly awaiting the release of the full-year 2023 financial results, and the continuation of the bullish trend will be contingent upon positive outcomes.

While acknowledging occasional bearish movements resulting from profit-taking, Eze expressed optimism that positive financial results would stimulate increased investor activity in the sector, particularly as they position themselves for dividend payouts.

About the government’s ambition to achieve a $1 trillion economy, Eze noted that the Central Bank of Nigeria (CBN) governor hinted at potential bank recapitalization to N1 trillion or more.

“Investors, anticipating this directive, strategically positioned themselves, leading to a rally that surpassed the N1 trillion regulatory proposal for some banks,” he said.

Eze also commented on the recent reorganization carried out by the CBN in three banks, expressing expectations that the new directors would infuse fresh perspectives into the institutions.

He emphasized the need for the new leadership to avoid a recurrence of challenges faced by their predecessors.

The Managing Director/CEO of APT Securities and Funds Limited, Kasimu Garba Kurfi noted that the banking sector’s initial ascent may encounter challenges in sustaining momentum due to underlying issues.

“The primary concern is the imperative for many banks to access the market to align with the new capitalization requirements mandated by the Central Bank of Nigeria (CBN).

This impending need for capitalization is anticipated to significantly impact the sector’s overall performance throughout the year 2024,” he said.

It is believed that the confluence of promising factors positions the Nigerian banking sector as a significant driver of capital gains and share appreciation in 2024.

This is the sequel to the stimulation of the business environment via recapitalization of the banking and insurance industry, merger & acquisition of banks, and anticipated energy sector reform aimed at increasing capacity and infrastructural growth.

Investors seeking exposure to this potentially lucrative sector should carefully assess individual companies and risks before making investment decisions.

However, cautious optimism and effective management of potential challenges will be key to unlocking the full potential of this exciting sector.

-Nairametrics