Given the heightened volatility across financial markets, driven by geopolitical developments and monetary policy responses to inflation and currency pressures, we believe FY’23 presents a new opportunity for Nigerian banks to reimagine or consolidate go-to-market strategies. Even as banks have demonstrated resilience in light of post-pandemic externalities, we see renewed threats from stricter regulatory environments, political risks, and nimbler fintech competition. Against this backdrop, we assess our coverage banks’ exposures and readiness to mitigate these risks through their diversification footprints and by embracing digital technologies for scale.
Banks’ NIM resilience put to the test
Fiscal indicators and the recent body language of the monetary authorities suggests that yields are likely to rise in 2023. The implication for domestic money banks is the continued repricing of assets higher in tandem with market realities. Indeed, our analysis revealed that our coverage asset yields have risen 2.1 ppts since Q1’21. During the same period, banks’ interest incomes have grown by 11.0% on average, improving interest income contribution to gross earnings to 74.1% from 69.4%.
However, notwithstanding the projected climb in asset yields, we are wary of the potential funding cost drags on net interest margin (NIM). Our review of banks’ historical performances reveals that movement in cost of funds appears to have had a more material impact on NIMs than asset yields. In FY’23, banks’ NIMs are likely to be assaulted on two fronts: 1) further increases in the benchmark policy rate and 2) strained liquidity, heightening banks’ competition for funds.
A. Despite free fall in the yield environment in 2020, banks’ NIMs were supported by the faster plunge in funding costs relative to asset yields
B. Funding costs rose faster than asset yields to slow the pace of NIM recovery in 2021
C. Asset yields have been supportive of NIMs in 2022. But a much faster climb in funding costs is proving concerning
