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The Nigerian banking industry is expected to put up a good
showing this year in the aftermath of apprehension over recently concluded
national elections. According to a report by Renaissance Capital (RenCap), a
global institutional finance company, the economy will receive a boost but
warned that inflation will remain high.
“Nigeria’s inflation will remain stubbornly high in 2011, owing
to structural factors including poor infrastructure, high commodity prices and
an expansionary fiscal policy. Given the strengthening inflationary pressures,
there is room for additional hikes of the monetary policy rate to beyond 7.5
per cent.”
Tabula rasa
The report stated that Nigerian banks are starting on a clean
slate following the clean-up of their books by the Asset Management Corporation
of Nigeria. It added that strong capitalisation and ample liquidity provide a
positive background for the banks to do well in 2011.
It however cautioned on the inherent risk in the system, especially
macro and political risks, particularly with oil remaining a key factor for
Nigeria’s budget and revenues.
“At the sector level, post the recent crisis, regulation will
need to prove itself through the cycle before we are fully comfortable,” it stated.
RenCap added that the macro economic environment is a function
of how the government decides to tackle underlying issues. With ongoing reforms
in that direction, the report cited the power, agriculture, oil and gas sectors
are identified as areas where the banks can leverage.
“Loan book concentration risk forces banks to look beyond these
sectors, and the fast-growing telecoms sector has been an area of much bank
focus, while the power sector, and potentially the agriculture sector, are seen
as areas of potential growth going forward.”
The report estimates that the services sector will remain the
largest contributor to real GDP (gross domestic product) growth in 2011.
“On our estimates, owing to the potential for the telecoms
sector to continue expanding exceptionally rapidly, and in light of sustained
strong wholesale and retail trade growth.”
High dividend payout
According to RenCap, unlike other emerging markets where banks
pay little out as dividend due to need for growth and safety, Nigerian banks
pay as much as 40 to 60 percent of their earnings as dividend.
“This reflects the dividend demands of a large proportion of their historic
local investor base. Hence, in a growth environment like Nigeria, coupled with
current dividend policy, sizeable CARs (cash reserve ratio) can be eaten into
relatively quickly.” The CAR is a measure of a firm’s ability to pay its
short-term obligations by comparing the firm’s cash reserves and liabilities.
