Business

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A report on banking in Nigeria predicts that the future of banking in the country is tilting towards ancillary banking

|  By Vincent Nzemeke  |  Aug. 5, 2013 @ 01:00 GMT

THE future of banking in Nigeria will rest on ancillary banking such as merchant banking, primary mortgage institutions as well as retail and small and medium scale enterprise banking. This prediction was contained in the 2013 edition of Nigerian Banking Sector Report published by AFRINVEST. The report titled: Standing of the 4th Pillar was unveiled to the public in Lagos on Wednesday, July 24. The event was attended by Aigboje Imoukhuede, vice chairman of Nigerian Stock Exchange, Alile Hayford, Bismack Rilwane, chief executive officer of Financial Derivatives, Ike Chioke, chief executive of AFRINVEST and many other dignitaries.

According to the report, the banking industry in Nigeria is now confronted with the reality of declining incomes, mobile money and dollar denominated capital sources. This development has led to the re-emergence of “real banking” as traditional income/profitability continues to come under threat from increased competition and tighter regulations.

The AFRINVEST report also predicts that the outlook on yields and fee income will remain down thereby necessitating the need for banks to focus on lending to the real sector.

To insulate themselves from the predicted loss, AFRINVEST advised banks to develop and grow the depth of their core retail banking business in order to retain and amplify cheap deposits. It also urged banks to expand their geographic footprint and business scope as urbanization gradually remodels cities and sub-urban areas.

As for mid-tier banks, the report advised them to consolidate and integrate vertically in order to compete with tier-1 banks as economies of scale and scope increasingly become the differentiating success factors. The report also quoted the World Economic Outlkook, WEO Update, which predicted that the world economy will grow by 3.0 percent in 2013 as against actual growth of 2.3 percent in 2012. However, growth in the Sub Saharan Africa is expected to be weaker as some of the largest economies such as Nigeria and South Africa struggle with domestic problems and weaker external demands. The region is poised to deliver growth of two percent in 2013 lower than the 2.5 percent growth recorded in 2012.

Analyzing developments in the Nigerian banking sector for 2012, the AFRINVEST report also noted that many banks in the country face the challenge of trying to beat high earnings expectation which encouraged them to leverage on high yield environment and increase exposure to fixed income securities in order to maximize tax free returns. The report predicted that the “treasury focused” investment strategy will moderate in 2013 as outlook on yields and fee income decline.

On profitability, the report shows a clear distinction from earnings posted by Tier 1 and Tier 2 banks. All Tier 1 banks recorded gross earnings in excess of N200 billion while those in the lower tier posted N102 billion average. The growth in most Tier 1 banks was attributed to impressive earnings which resulted from high margin whereas Tier 2 banks depend more on asset turnover to grow earnings.

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