Mid-tier Banks Show Solid Earnings Potential But Still Need to Recover From the 2016 Recession


Wednesday, July 04, 2018 02:57 PM / Moody’s Investors Service 

Nigeria's mid-tier banks -- Fidelity Bank Plc (Fidelity), Union Bank of Nigeria Plc (Union), First City Monument Bank Limited (FCMB), Sterling Bank Plc, and Diamond Bank Plc (Diamond) -- will grow their earnings materially over the long-term, says Moody's Investors Service ("Moody's") in a report published today. However, operating conditions will remain challenging over the next 18 months, as the economy slowly recovers from the 2016 recession. 

Moody's report, "Diamond Bank, FCMB, Fidelity Bank, Sterling Bank, Union Bank; Nigeria's mid-tier banks show solid earnings potential but still need to recover from the 2016 recession," is available on www.moodys.com. 

"Nigerian mid-tier banks suffered more severely than the top five largest banks from the 2016 recession and are still recovering," says Akin Majekodunmi, Vice President and Senior Credit Officer at Moody's. "Over the longer term, though, we expect their earnings growth prospects to be positive." 

Moody's views Fidelity, FCMB and Union as best positioned to weather current operating challenges, given their sound capital and liquidity buffers, but expects Diamond to face greater headwinds due to the bank's larger stock of soured loans and modest foreign-currency liquidity. 

Loan performance for the mid-tier banks has deteriorated in recent years but it is likely to stabilise because most foreign-currency loans and loans to the oil and gas sector have been restructured. 

Sound capital buffers, which compare favourably to global peer averages, mitigate some of the banks' high asset risks. Union, for example, raised 50 billion naira ($162.5 million) via a rights issue late last year and now exhibits the highest tangible common equity in the mid-tier peer group at 21% of risk-weighted assets. 

Most banks also hold sufficient liquidity to cover upcoming foreign currency obligations; only Diamond and Fidelity have Eurobonds outstanding, while all five banks have bilateral foreign-currency debt outstanding. 

Profitability, though, is likely to remain subdued over the next 12-18 months, with an average net income to assets ratio of just 1%, due to a reduction in the yields of government securities, muted loan growth and high provisioning costs. 

Over the longer term, however, the earnings potential for Nigerian mid-tier banks, and the country's wider banking sector, is positive. This potential rests on banking assets still being small compared to GDP (30%), about 60% of adults not having bank accounts, and the retail lending sector remaining underserved.

Proshare Nigeria Pvt. Ltd.


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