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Bank loans to grow 30 percent in 2013 – S&P

By on March 17, 2013

A surge in lending is likely to boost the earnings of Nigeria’s banks this year though loans are eating into capital reserves and are too concentrated in the oil sector, credit rating agency Standard and Poor’s (S&P) said on Friday. Nigeria’s banking sector earnings bounced back in 2012 from write downs of bad assets accumulated during a 2009 financial crisis that nearly sank nine of them. Lenders fixed their balance sheets by selling bad loans to a state-owned “bad bank”.

“We forecast that bank earnings will continue to rise because of the healthy macro-economic environment supporting bank activities,” S&P’s financial services ratings associate director, Samira Mensah, told Reuters in a telephone interview.

“We have seen earnings strengthen, stemming from high levels of net interest margins and a lot of government securities providing high yields at the moment,” Mensah said.

Nigerian banks are likely to see return on equity (ROE) rise to 18 percent this year from about 15 percent in 2012, buoyed by an expected 30-percent rise in loan books, up from 12 percent growth last year, Standard and Poor’s (S&P) said.

Tier 1 capital ratios are expected to fall to 15 percent from last year’s 20 percent, Mensah said, adding that these were still adequate but there were risks posed by loans being too concentrated in the oil sector and foreign currency lending.

Banks in Africa’s second biggest economy are due to release their results from this month, and most analysts expect them to show significant earnings growth, further boosting their shares.

The local stock index, of which banks contribute 60 percent of total capitalisation, has risen 18.3 percent so far in 2013.

Mid-tier Diamond Bank said it expects full-year 2012 profits to hit 30 billion naira ($190 mln), after releasing its nine month results, where it posted 23.2 billion naira profit, compared with a loss of 16.3 billion naira in 2011.

Diamond Bank showed the fastest rise in loan growth last year, analysts at Renaissance Capital said, with loans up 38 percent during the first nine months of 2012 while First Bank’s lending was up 22 percent in the same period.

“We believe power projects could propel (loan) growth (for top tier banks) into the 15-20 percent range, and we think the tier-2 banks could grow faster,” analysts at Rencap wrote in a note highlighting the outlook for Nigerian banks in 2013.

S&P’s Mensah forecast loan growth of up to 30 percent for top-tier banks like Zenith Bank in 2013, which last year told Reuters it expected its loan book to grow 20 percent in 2012.

Mensah said growing loan books also had some risks, especially when loans were not diversified across sectors.

“What we see as a significant risk is the concentration risk (on oil) which reflects the structure of the economy,” she said, adding that there were also foreign currency risks.

The local currency this week fell to its lowest in seven months of 158.92 naira against the U.S. dollar on low interest from foreign investors in bonds because of lower yields.

Offshore flows had provided support for the local currency , which had stabilised around 157 naira to the greenback before March.

The central bank intervened on Friday to stem the fall, but concerns over naira weakness persist.

S&P has assigned a BB- rating to Nigerian banks. Mensah said lenders where constrained by the level of the sovereign ratings because the bulk of their operations where done domestically with exposure to government securities.

“If we see … sustained oil prices and continued reforms from the government (so that) ratings on the country improve, then we could see an upgrade to bank ratings,” she said

 

[Business Day]