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Lifting The Veil off The Financial Sector

Proshare

Friday, May 5, 2017 4:00 PM /Proshare Research 

Financial institutions are not immune to the negative price effect that emanate from cyclical downturn. Thus, this report focus on the study which x-rayed the financial performance of a construct comprising some banks. The construct is made up of both deposit money banks and merchant banks. 

The study highlights the importance of financial intermediation and its role in greasing the economy with liquidity. It also identified how external pressure is partly responsible for blistering credit risk and diluting micro prudential ratios, which has led to a fall in credit rating of banks due to emboldened roiled risk. The study also identified both growing global volatility and rising policy uncertainty as factors fuelling liquidity risk adding that the nature of the risk is largely systemic.  

In the course of the study, we discovered growing leverage exposure in banks, though there was an improvement in the overall balance sheet mosaic. More importantly, it pointed out that banks contribute more than 20% to the nominal GDP while identifying that there is also an increase in the liquidity squeeze, which led to a rise in corporate leverage. 

Furthermore, we observed substantial erosion in capital due to rising loan impairment in specific banks. This calls for an urgent need to recapitalise those banks having suffered dilution in its asset. 

In specifics, the report pointed out growing market concentration among some banks, highlighting the presence of subdued competition in the industry. While the report claimed that market concentration could pose a high risk to the industry, the cost of moral hazards by any of the concentrated banks could trigger a crisis, e.g. 2008 banking crisis in Nigeria, Lehman brother crisis and the Iceland banking crisis in 2008. 

The occurrence of asset clustering among few banks can stir strong reverberating effect not only on the financial sector but the whole economy as a whole. In most times; it is accompanied with high network risk. Therefore the study recommends stronger micro prudential ratios and improved supervision by the regulator.  

The study also showed how banks are adjusting to the unfavourable climate by diversifying their portfolio away from loanable income. Absorption of other financial asset in banks portfolio has helped to hedge off risk in the real economy. At the same time, it has provided the right nursery for cash replenishment. 

Lastly, it offered solutions such as improvement in the asset quality of banks so as to refill exhausted shock absorbers e.g. CAR ratio, improve liquidity ratio, and reduce gearing ratio. The study emphasized on the importance of more macro vigilance and proper monetary signaling in order to reduce the volatility experienced by the nominal currency. 

In conclusion, the study accepts that an improvement in micro prudential ratio by bank is necessary but will not be enough to reduce the repeated cycle of rising non performing loans. Thus, the study recommended a fiscal management policy which is more pre-emptive towards shocks and accommodative of backward integration.  

Download the April 2017 – Proshare Confidential report here. 

Previous Proshare Confidential Report(s)

1.       Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model

2.      FX Utilisation in January 2017-Symptoms of An Opaque Structure 

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