The Guaranty Trust Holding Company (GTCO), Africa’s Most Admired Financial Services Brand has released its macroeconomic outlook for 2022 and it provided a full-fledged details of what to expect from the Banking Industry in 2022 and its impact on the Nigerian economy.
The report by the Guaranty Trust Holding Company (GTCO) revealed that the Central bank of Nigeria issued N2 trillion Open Market Operations (OMO) bills mostly in long-tenured bills of 180 to 361 days in 2021.
A comparison between the OMO bills issued in 2021 and that of 2021 showed that the OMO bills issued in 2021 were significantly lower than the N7.1 trillion the apex bank issued in 2020.
The GTCO report dubbed “Nigeria’s Macroeconomic Outlook for 2022”, predicted that the CBN will continue with the discretionary cash reserve requirement (CRR) debits in 2022 and stated that this could impose significant negatives on the asset yield for the sector. It also highlighted that the commercial banks’ ability to create credits might be impeded since 50 percent of their total naira deposits are held by the CBN as special bills and CRR.
Competitive landscape and Liquidity
The report also revealed that the low Monetary Policy Rate of 11.5%, which has directly affected the interest coupon on the fixed income securities, will exert pressure on credit creations by banks and would in turn increase competition from quality loans amongst banks and cause lending rates to go up slightly.
The report added that the year could witness an intensified competition for deposits not only between banks and non-bank competitors but also with the Federal Government because of the FGN Sukuk Bond issuances and possible increased subscriptions of the e-Naira. However, the report stated that the banks would continue to look for innovative ways to grow non-interest revenue as well as consumer and retail loans.
In view of an expected increase in the government borrowing from the increased budget deficit, the dwindling revenues and rising inflation rates, a low interest might not hold much longer. Hence, the report projected that the CBN would implement a tight monetary policy in the second half of 2022 to deal with excess liquidity inflow into the economy following the electioneering campaigns.
GTCO reports, “Although, it is unlikely that the CBN will slow down on its discretionary CRR debits, we expect more banks to approach the CBN to release their excess CRR to enable funding of their transactions, and payment of regulatory levies, etc.”
The report further stated that regulation, non-bank competitors, law enactment and reactions to macroeconomic conditions would primarily drive the competitive environment. It estimated that the non-bank competitors would eat into the banks’ profits in 2021 as more fintech companies spring forth and offer range of financial services to banked customers using asset-light technology, especially with the expected licensing of the MTN and Airtel to commence Payment Service BANK (PSB) operations in 2022.
GTCO therefore, admonished the CBN to subject the telecoms that desired to play in the PSB space, “to the same rigorous KYC procedures in place for banks and the payment of similar levies and charges” and sought for the banks ability to run a wallet account system in addition to the traditional accounts.
Nonetheless, the GTCO report read that the commercial banks had pre-empted the possibility of telecoms becoming licensed financial services providers and consequently, has initiated the establishment of the Shared Agency Network Expansion Facilities (SANEF) in a bid to minimize its impact on industry earnings and their market share.
The report also made mention of the e-Naira as an evolution of the naira. The report stated the impact of the e-Naira on the traditional banking institutions, noting that its success would largely be dependent on the number of active users, merchant adoption rate and value-added services available on the app.
GTCO also stated that the macro-economic challenges and headwinds that had gradually wiped out and /or constrained a significant portion of the banks revenue will make banks initiate restructuring and transition policies that would enable them to diversity their earnings base.
Basel III implementation
Furthermore, the GTCO report stated that the introduction of Basel III, a framework intended to achieve stronger capital and liquidity positions for banks for improved stability of the global financial sector. The Basel III provides guidelines on the breakdown of the total capital that has evolved to the further division of the Tier 1 Capital into Common Equity Tier 1 (CET 1) and Additional Tier 1 (AT1) Capital with minimum ratios of 10.5% and 0.75% respectively.
Hence, the framework which is expected to strengthen a more stringent capital regime where the strength and sufficiency of a bank’s tier-one capital would determine how much risk it can take, would motivate most banks to shore up their Tier 1m capital position.
Restructuring and transitions
In response to the changing competitive environment and regulatory constraints, some banks have initiated restructuring exercises that will see them diversify their earnings base into other non-banking operations while consolidating market share and operations in the banking industry. Some of the banks seeking to restructure are in the process of finalizing regulatory requirements for the requisite approval to restructure and join the likes of FBN, Stanbic, FCMB and most recently, GTCO, operating as holding companies.
The GTCO therefore expects the CBN to encourage banks with capital shortfalls to retain a sizeable position of their earnings as they institute transitional arrangements that will assist those companies to build up their capital within a period of three-five years.
For the banking industry in 2022, we expect to see reduced earnings due to the flood entry of the fintech companies into the banking industry offering similar financial services to the customers. Also, we expect more of the Nigerian banks to become more diversified and engage in other non-bank activities. We also expect the banking industry to grant increased loans to the manufacturing and small-scale enterprises in the first half of the year due to the low interest rate (i.e. the Monetary Policy Rate). However, in the second half of the year, the cost of borrowing is likely to increase as the Monetary authorities are likely to increase the Monetary Policy Rate to address the inflationary pressures that may arise from the electioneering campaigns.