Coronanomics (20) - Sectorial Analysis of Nigeria's Finance and Insurance Sector

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Friday, June 26, 2020 / 04:40 AM / by Proshare Content/ Header Image Credit:  EcoGraphics

 

Finance and Insurance Sector

Despite the spread of COVID-19, the finance and insurance sector grew remarkably in the Q1 2020. The sector grew by 20.79% in Q1 2020, an improvement from 20.18% in Q4 2019. Financial institutions grew by 24.0% in Q1 2020 from 22.33% in Q4 2019 and -9.21% in Q1 2019. The insurance sector grew by 2.94% in Q1 2020 from 3.21% in Q4 2019 and 2.58% in Q1 2019.

 

Illustration 21: Effect of COVID-19 on Banks

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The pandemic is forecasted to have a negative significant effect on the finance and insurance sector in Q2 2020 and probably the rest of the year. Coronavirus has adversely affected global trade such as the global oil market, causing volatility in oil prices. Data from bank's financials reveals that the majority of their gross loans are allocated to the oil and gas sector making them vulnerable to increase indebtedness i.e. increase in NPL. Weak economic activities caused by the coronavirus will affect the ability of businesses to repay debt, thus weaken asset quality of banks (including microfinance banks). The coronavirus induced interest-rate reduction will weaken the profitability of banks. 

 

COVID-19 and The Burden on Banks

  • Credit Risk: Increased defaults due to a decline in economic activities, higher credit exposures and rating downgrade of customers, an increase in expected credit losses and non-performing loans.
  • Profitability/Capital Adequacy: Low business activities and higher impairment and losses will likely lead to a reduction in profit level and capital depletion, with Capital Adequacy Ratio likely falling below regulatory limits
  • Market Risk: Expected fair value losses on the back of increased credit spreads, as well as the impact of net foreign exchange (FX) devaluation varying with banks' net FX position
  • Operational Risk: Banks are likely to suffer from Business execution and process management failures as well as the likelihood of system failures and business disruption due to alteration in employee working arrangements in the wake of the Work-from-Home strategy adopted to curtail the spread of the virus
  • Liquidity Risk: Banks' liquidity position likely to be affected by the reduced cash inflows from loan repayments. Increased cash withdrawals relative to reduced savings, a decline in transactional activities will also affect liquidity
  • Cyber Risk: The prevalence of Work-from-Home conditions means increased exposure to cyber risks. Cybercriminals may exploit remote access weakness using new techniques to perpetrate cyber fraud
  • Currency Risk: Banks with a mismatch in their foreign currency (FCY) denominated assets and liabilities may experience face significant exposure to currency risk occurring from the expected defaults on the FCY assets compounded with the recent adjustments in exchange rates by the CBN


The slowdown in economic activity caused by the pandemic will undermine the growth of insurance companies and possible contract insurable exposures. There will likely be a strain on investment portfolios maintained by insurance companies. Furthermore, it is likely going to lead to an increase in insurance coverage disputes, an increase in defaults by insured persons and companies, reduced premium remittance and there is a strong chance that a significant number of insured persons will begin to deprioritize a lot of their insurance policies and restructure them as they focus on survival during the harsh economic conditions.

 

Illustration 22: Effect of COVID-19 on Insurance Sector

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The decline in premiums which form the major source of revenue for insurance companies will adversely affect the revenue of insurers and hurt their business sustainability.

 

Chart 109: Finance and Insurance Sector Quarterly Growth Rate (%)

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Source: NBS, Proshare Research                                                    

    Note Asterisks (*) - Forecasted figures 

 

Case Study: Zenith Bank

Zenith Bank is engaged in the provision of banking and other financial services to corporate and individual customers. The Bank's segments include corporate, retail banking and pension custodial services.

 

Zenith Bank Gross Earnings

Zenith Bank's gross earnings rose by 5.07% in 2019. Its gross earnings rose from N630.34bn in 2018 to N662.3bn in 2019 (see Chart 110). 


Despite a contraction in Nigeria's economy in 2016 and 2017, Access Bank's gross earnings grew by 17.44% and 46.69% respectively. The narration is predicted to be different in 2020. The Bank's gross earnings are predicted to decrease slightly due to the pandemic virus which has affected the oil sector and the overall economy.

 

Chart 110: Zenith Bank Gross Earnings (N'bn) 2015-2019

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Source: Zenith Bank Financials, Proshare Research 

 

Zenith Bank PBT

Zenith Bank's profit before tax rose consistently from 2015 to 2019. Its profit grew by 5.01% in 2019. Its profit rose from N231.69bn in 2018 to N243.29bn in 2019 (see Chart 111).

 

Zenith Bank's profit before tax was resilient despite the contraction in the economy in 2016 and Q2 2017. In 2016 and 2017, its profit grew by 24.78 and 29.8% respectively. Its profit is forecasted to decline in 2020, due to a fall in global oil demand and the slow down in the Nigerian economy.

 

Chart 111: Zenith Bank PBT (N'm) 2015-2019

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Source: Zenith Bank Financials, Proshare Research

 

Zenith Bank NPL Ratio

Zenith Bank's NPL ratio declined to 4.3% in 2019 from 5% in 2018. In 2016 and Q2 2017 when the economy contracted, Zenith Bank's NPL ratio rose consistently. Its NPL ratio increased in 2016 and 2017 to 3.02% and 4.7% respectively (see Chart 112).

 

It is forecasted that Zenith Bank's NPL ratio would most likely increase in 2020. This is so because the major chunk of the bank's gross loans goes to the Oil sector which has been adversely affected by COVID-19.

 

Chart 112: Zenith Bank NPL Ratio (%) 2015-2019

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Source: Zenith Bank Financials, Proshare Research 

 

Zenith Bank Leverage Ratio

Zenith Bank recorded its lowest leverage ratio of 38.39% in 2019. Its leverage declined from 97.88% in 2018 to 38.39% in 2019. Its low leverage ratio implies it has higher equity relative to its debt. Its leverage ratio is forecasted to rise in 2020 due to the virus (see Chart 113).

 

Chart 113: Zenith Bank Leverage Ratio (%) 2015-2019

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Source: Zenith Bank Financials, Proshare Research

 

Zenith Bank Liquidity Ratio

Zenith Bank's liquidity ratio declined to 57.25% in 2019. Its liquidity ratio declined from 80.91% in 2018 to 57.25% in 2019. Its liquidity ratio is forecasted to decline further in 2020 due to the coronavirus (see Chart 114).

 

Chart 114: Zenith Bank Liquidity Ratio (%) 2015-2019

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Source: Zenith Bank Financials, Proshare Research


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Related Reports (PDF)

1.     Download the Full PDF Report - Coronanomics and the Nigerian Economy, June 06, 2020

2.     Executive Summary PDF - Proshare, June 06, 2020

 

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