Nigeria’s banking sector is set to capitalize on easing inflation and expectations of a Monetary Policy Rate (MPR) cut, with the NGX Banking Index surging 48% year-to-date as of August 15, adding N6 trillion ($3.9 billion) in market value. The rally, up from 7% in Q1 and 18% by June, reflects strong H1 2025 earnings and investor inflows, with further upside anticipated if the Central Bank of Nigeria (CBN) lowers the MPR.
Inflation dropped to 21.88% in July, the lowest since January 2023, down from 22.22% in June, marking four consecutive months of decline. Bismarck Rewane of Financial Derivatives Company projected this trend, citing naira stability at N1,500–N1,600 per dollar, lower energy costs, and the harvest season. Rewane suggested the CBN could cut the MPR by 25 basis points to 27.25% at its September meeting, potentially boosting credit demand and loan growth.
Arnold A. Dublin-Green of Cordros Asset Management noted, “Disinflation and a lower MPR support banking stocks by reducing discount rates on future earnings, enabling higher valuations and fostering loan growth.” However, Egie Akpata of Skymark Partners cautioned that lower rates could reduce interest income, compressing net interest margins, with loan growth constrained by factors beyond the MPR.
A rate cut could lower yields on fixed-income assets, prompting investors to shift to equities. Akpata added, “Falling bond yields could drive rotation into stocks, particularly banking shares.” However, the Cash Reserve Ratio (CRR), which rose to N25 trillion in 2024 from N18 trillion, limits liquidity. Renaissance Capital reported that FUGAZ banks (FirstBank, UBA, GTCO, Access Holdings, Zenith) lost N840.2 billion in potential income due to CRR debits. Easing CRR could spur inflation, a concern for the CBN, which retained the MPR at 27.5% in July to sustain disinflation, as stated by Governor Olayemi Cardoso.
Analysts suggest banks could see stronger profitability and valuations if disinflation persists, but high CRR and inflation risks may cap gains. Investors should monitor corporate earnings and dividend announcements, as Akpata noted that any rally will likely hinge on robust financial results rather than policy changes alone.
