Banking Industry Analysis

As Nigerian banks’ Q earnings season approaches, we express our thoughts on how developments within the quarter will impact banks’ earnings. With fading concerns on asset quality, shifting competitive landscape and expanding loan books, banks are likely to build on the generally impressive HI, 2011 earnings performance despite a challenging operating environment.

Banking in Q: A Challenging Macroeconomic Turf Insignia’s macroeconomic story in Q was far from exciting as headwinds from the global economy continued to exert pressure on corporate performance and the uncial market in particular. The world continued to grapple with the fear of a double dip recession while the quest for safety and liquidity persistently fuelled net funds outflows from emerging markets. Buoyed by sustained monetary tightening, inflation remained within control in the quarter with a positive impact on real returns.

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We believe the frequent adjustments to the MR., though with lagged effects on lending rates, should boost banks’ net interest margins as rising fixed income yields, coupled with sticky deposit rates, will continue to bode well for banks with liquid balance sheets. Furthermore, with excelling cost to income ratios, Nigerian banks have shown that they can effectively keep costs under control. Exchange rate stability was a key hurdle for monetary authorities within the quarter Banking Industry Analysis By locally greenback.

We expect dominant players in the WADS market to benefit from the relative weakness and volatility of the Naira in Q. While crude oil prices assumed a downward trend in the quarter, production remained fairly stable. The Oil and Gas sector remains one of the key growth sectors for banks, hence a possible pull back in oil prices (in light of the bleak global economic outlook) presents considerable onside risk to banks’ earnings. Banks continue to explore Insignia’s vast retail banking space as they are increasingly sourcing a large pool of deposits from cheap retail funds.