Investors, particularly foreign investors are skeptical about investing in Nigerian banks, with some expressing concerns that strong results the six biggest banks are reeling out, mask the true state of finances in spite of oil hedges.
Returns at Nigeria’s top banks are running at levels that their European counterparts can only dream of, and the country’s biggest lenders are eyeing up an opportunity from the 60 million citizens without bank accounts.
But according to Ronak Gadhia, an analyst for investment bank EFG-Hermes, the pool of investors who want to own Nigerian lenders is shrinking.
“There used to be quite a few supporters,” he told the Financial Times. “Now, it’s very hard to get a client to pick up when you are calling to discuss Nigerian banks.”
Some investors are averse because of wider conditions in Nigeria. The country’s currency value is volatile, with a central bank that props up the naira, before sudden devaluations, as happened in March and July.
Nigeria has currency controls, adding to investors’ concerns about unpredictability and getting their cash out.
When it comes to banks, the main source of investors’ caution, says Mr Gahia, is a belief that the average 19.5 per cent return on equity enjoyed by the big-six Nigerian banks in the first half of the year masks the true state of their finances and outlook.
The “cost of risk” for the six, which measures their credit charges flowing through banks’ income statements as a percentage of their total loans, was just 1.6 per cent for the first half of 2020, far lower than the 5.3 per cent EFG analysts predicted for the full year.
The low charges were at odds with the Covid-19 pandemic, which locked down Nigeria’s biggest states at the end of March and ended international and domestic flights, driving the country into its worst recession in more than a decade.
Nigeria, where the oil sector accounts for about nine per cent of economic output, but about three-quarters of export revenues and nearly all foreign exchange, also had to deal with record low oil prices, caused by both the pandemic and an oil price war between Saudi Arabia and Russia.
There is an opportunity for banks to grow their business by tapping the population of adults in Nigeria without bank accounts.
“2020 has been a very challenging and I guess I should say unprecedented year as we continue to deal with the health, financial and economic impacts of the Covid-19 pandemic,” UK Eke, then group managing director at First Bank of Nigeria, told investors on an analyst call on August 3, describing the “monumental contraction” in economies across the world.
Still, the bank, which is the country’s third-largest lender by assets, grew pre-tax profits by 56 per cent in the first half of the year, as a modest increase in loan losses was more than outstripped by a surge in interest revenues, largely from treasury activities, which benefited from volatile markets.
Other Nigerian banks reported a similar trend. Rating agency Fitch warned in April that Nigerian banks were at “severe risk” from the oil price slump and the pandemic.
Mr Ghadia says banks’ “significant exposure” to the oil and gas sector was so far proving “more resilient than most other parts of the (loan) book”.
