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00:00Nigerian banks delivered triple-digit profits growth in 2024, but can we expect the momentum
00:06to be sustained this year?
00:08Analysts at Zcrest Wealth believe so.
00:10They say that a robust interest income, digital transformation and a sustained elevated interest
00:14rate will be the key drivers.
00:16They also note that the recapitalization drive will enhance banking profits.
00:21We have Bemini Shukweju.
00:22She's an investment analyst at Zcrest Wealth.
00:24She joins me now to share their outlook on the sector.
00:27Thank you so much for your time today, Bemini.
00:28And I'd like you to speak to what we saw play out last year in terms of the performance
00:32we saw with the banks.
00:36Thank you for inviting me, Ken.
00:37So basically last year, what we saw was that at the beginning of the year, the banks were
00:41doing extraordinarily well.
00:42Like in Q1, we saw that the banks had returned about 40% in year-to-date returns, but all
00:49of that was like quickly like taken away.
00:51You know, when we saw the banking recapitalization activity come up as well as the 70% windfall
00:56tax on these banks actually like evaded investor appetite in this particular banking stock.
01:02So yes, the index of the banks just quickly went down into a negative position.
01:06And we saw that actually like remain because it was there up until like August, November,
01:14where we actually started seeing these banks return back into the positive region, obviously
01:17due to the fact that like you have said, the banks kept on returning steady income, steady
01:23profit at a tax.
01:24So it was a triple-digit product at a tax almost across all the banks, and that actually
01:29like increased investor appetite into these banking sector stocks.
01:34So that actually improved these banks' performances across board.
01:38So we saw that fuel signs at the end of the year, where the banks closed about 15% year-to-date
01:44as a sector, as a sector, yeah.
01:47So basically last year was like a mixed year for the banks, where it started off really
01:51good, middle of the year was shaky, the end of the year continued picking up due to the
01:55fact that the banks kept on returning triple-digit profit at a tax.
02:00All right, let's get your outlook.
02:01I see that you're quite optimistic on performance for this year.
02:04Sorry?
02:05I'd like to get your outlook.
02:07I see that you're quite optimistic for this year.
02:09Okay, yes.
02:10So like I said before, last year we saw that the banks were actually returning these very
02:16high levels of profit, and we actually expect that to kind of persist coming into this year
02:20because if you look at the profits, we see that the banks are actually, I mean, the core
02:25banking mandate or the core revenue mandate for banks usually lie in like lending and
02:29interest income, which actually takes up about 70% of, you know, like these banks' bottom
02:34line.
02:35But we are beginning to see them diversify, like we said.
02:38So we anticipate more digital transformation, which will actually boost their non-interest
02:42income line, which we have actually seen become resilient.
02:45So our outlook for this year for banks is actually one of, like, sustained growth.
02:50We expect the banks to sustain growth across their non-interest income channel as well
02:55as their interest income channel, given the fact that we are still in a period of elevated
02:58rates, and these banks have actually bought bonds, treasuries, and different government
03:03securities.
03:04You know, banks are beginning to move more into government securities, and they are locking
03:09in these high rates.
03:11So basically, we are seeing, like, a little bit less, like, risk in the banks, given the
03:15fact that they are going more into government securities.
03:18So that's actually going to help bank profitability in this year.
03:21Yeah, it's a good thing you mentioned the word risk there, because I'd like to look
03:25next at the concerns that you could see down the line for profitability for the banks.
03:29Okay, so honestly, as of right now, the risk, the returns actually outweigh the risk.
03:38I think the only risk I see is on the recapitalization end for the Tier 2 banks.
03:42A lot, like, Tier 1 banks, like, Aktiv, and higher Tier 2s, like FCM, we have actually
03:46finished their capital raising activity.
03:49So most of the risk is now looking at, okay, what are these other Tier 2 banks going to
03:53do in terms of, like, capital raising?
03:55How are they going to raise the required capital for the CBN, required capital for their capital
04:02recapitalization?
04:03And how are they going to, like, shore up their capital expenses?
04:05I think those are the only risks I personally see right now for them, but minus that, as
04:10the banks are tilting more towards government securities and shoring up their assets, I
04:17still see, like, the profitability actually, like, being sustained.
04:20Yeah, but in terms of the tailwinds, things that could move the sector forward, is it
04:25going to be more of the same as what we saw last year?
04:26Are we going to see some new entrants coming there?
04:28Because I was talking to my analyst earlier today and talking about the possibility of
04:32a stronger Naira.
04:35Okay.
04:36So in terms of – in terms of – I think you mean FX devaluation.
04:42We haven't – sorry?
04:43Yeah, you can continue.
04:46We haven't – okay, yeah.
04:47We haven't seen that affect as much as we saw in 2023.
04:50So that has actually gradually reduced.
04:53We actually – in our outlook reports, we actually anticipate a stronger Naira, where
04:56the Naira should be trading at about 1.4, 1.5 at the end of the year.
05:01So we actually do anticipate a stronger Naira as well at Zcrest.
05:04But what we see – what we do see is that the banks are not going to be very negatively
05:09affected due to the fact that at the beginning of the year, last year, they were actually
05:13asked to close all their long-term FX positions.
05:17So banks are now not really sustaining themselves on FX devaluation gains.
05:23They are now more sustaining themselves on non-interest income and also interest income
05:27elevation.
05:28Yeah, but let's look at the policy environment and how key that was – how key would that
05:32be in terms of driving profitability for the bank going forward?
05:36Sorry?
05:37The policy environment, the monetary policy environment.
05:39Okay, okay.
05:40The monetary policy environment.
05:41Basically, for now, like we all know, we are currently in like the highest policy environment
05:47we've ever seen.
05:48So NPR is currently at 27.50.
05:52And as of when we wrote that report, NPR was at 27.25, but obviously, we saw like one last
05:58terminal hike at the end of the year.
06:01So basically, what we expect is that coming into this year, we expect interest rates to
06:07actually moderate.
06:08This year is kind of like a year of moderation, moving from a higher base of inflation to
06:11actually lower base.
06:12We expect interest rates to moderate.
06:13And that will actually spur, like maybe in Q3, the MPC to actually like reduce interest
06:20rates.
06:21And this will actually spur like the banks, you know, but they have locked in their assets
06:25at like higher rates.
06:27But then again, this will actually spur the banks to actually like, you know, begin to
06:30lend more to all these consumer goods companies that actually like now, it's more favourable
06:37for them to actually take money or take loans from the bank.
06:41So it affects you to actually spur their income as well.
06:44All right.
06:45Thank you so much for your time today.
06:46Good to meet you.
06:47I've got you there.
06:48She's an investment analyst at Z-Crest Wealth.