FOREMOST rating agency, Agusto and Co, has identified some themes that will shape the banking industry this year.
According to the firm, reform of the cash reserve requirement will have significant impact on the banking industry.
Head, Financial Institutions Ratings at Agusto and Co, Mr Ayokunle Olubunmi, says other factors like policy changes, economic conditions and technological advancements will influence the Banking Sector performance in 2024.
According to him, compliance with the Loan to Deposit Ratio (LDR) will drive loan growth as it will help unlock more funds for credit expansion; high interest rate environment; macroeconomic downturn will trigger higher impaired loans and banks will play a more dominant role in the payment ecosystem.
He further stated that inflationary pressure, naira devaluation and salary reviews will increase
operating expenses of lenders, even as emigration will likely further deplete the skill set in the Industry, stressing that there would be probable transition to Basel III by banks this year.
His words “There are three major issues that will drive capitalisation exercise in 2024. The first is the low capital adequacy ratio. Devaluation of the naira has bloated the naira value of banks’ dollar holdings. This means that both assets and credit risks has increased, thereby reducing the capital adequacy ratio. If this drops below the threshold, the affected banks must recapitalize.
“Aside from that, the single obligor limit rule of not more than 20 percent of shareholders funds are being threatened because devaluation has increased the naira value of foreign currency denominated loans.
“A lot of banks are now in breach of the single obligor limit, so for them to align with the single obligor limit, they need to raise more capital.”
According to him, the CBN has also signaled raising the regulatory minimum shareholders funds this year.
Speaking at a forum organized by the Finance Correspondents Association of Nigeria (FICAN) in Lagos last week, Olubunmi said that predicting the exact outcome is difficult due to the dynamic interplay of these elements.
The forum had the theme, 2024 Economic Review/Outlook: “Impacts of Reforms on Banks.”
He noted that those that would proactively address the challenges and capitalize on the opportunities presented by these factors would likely emerge stronger and more successful.
This, he said, requires flexibility, innovation, and a clear understanding of the shifting landscape.
He said there will be a more accommodating Central Bank, hawkish monetary policy, reform of the foreign exchange market, lower FX gains and muted International Trade, among others.
The financial expert also said that expanding Nigerian banks abroad could diversify risk but might face new challenges.
He also noted that strengthening banks› capital base could improve stability and lending capacity.
Olubunmi said that consolidation could create larger, more efficient banks but potentially reduce competition, adding that issuing new licenses could increase competition and innovation, but potentially fragment the market.
Shake-up in the merchant banking segment according to him, could create opportunities for some banks and challenges for others.
He said that reform of the cash reserve requirement when modified could affect banks› liquidity and profitability, adding that enforcing loan-to-deposit ratio compliance could drive credit expansion but raise concerns about credit quality.
On basel III transition, the analyst said that implementing stricter capital adequacy rules could improve financial stability but raise compliance costs.
On macroeconomic downturn, he noted that economic slowdown could increase loan defaults and impact banks› earnings adding that banks might face competition from non-bank players in digital payments.
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