Banking sector uncertainty continues to plague Nigeria

The major driver of Nigeria’s stock exchange, the banking sector, has continued to wallow in the doldrums, steadily heading lower and lower despite forward valuations starting to look more and more attractive, as uncertainty remains the sentiment towards the sector.

Bids for the rescued banks have been received but are still being reviewed by the Central Bank of Nigeria (CBN), with Governor Lamido Sanusi being quoted in the press as saying he had received good bids for some of the rescued banks but that he needed to protect shareholder value and not every bid would be accepted.

Aside from uncertainty regarding the sale of the rescued institutions, the market is also watching to see what impact the recent additional measures which require lenders to sell all non-core businesses and form a holding company if they intend to carry out insurance, asset management and capital market activities will have.

Already, GT Bank last Friday announced it planned to divest its non-banking subsidiaries in order to comply with the new regulations, saying its directors would recommend the step, which would include the sale of a 68% equity stake in its Guaranty Trust Assurance insurance arm, to shareholders.

On a broader scale, the caution within the sector has had an impact beyond the stock exchange, with the bailout and additional mandatory provisioning that followed having led to a reluctance by banks to lend.

Sanusi last week lamented this scenario, saying weak bank lending to the Nigerian economy is a “major worry” and although the central bank wants single-digit inflation by the end of the year it will do nothing to jeopardise growth.

“Bank lending has not been growing as fast as we would like it to grow. So as far as upside risk of inflation, it is not very high,” he said, speaking ahead of a monetary policy committee (MPC) meeting today.

He, however, noted that higher government spending, with elections due next January, and the establishment of an asset management company (AMCON) to soak up bad bank loans should help put more money into the system, meaning the inflation risk was not zero.

Threats to the inflation risk were confirmed with August inflation accelerating to 13.7% from 13% in July. However, given Sanusi’s comments above, it would seem unlikely that rates will increase at the MPC meeting today.

What we can conclude with certainty, however, is that developments in the banking sector will remain key to the direction of both the stock exchange and the economy at large.

Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.