Nigerian Banks Face Credit Risks from Regional Expansion
With uncertainties spreading across the markets, including large foreign currency depreciations, Nigerian banks will face near-term execution and credit risks from their presence in other Sub-Saharan African (SSA) region, Fitch Ratings said in a note.
It however stated that its expectation depends on the degree of operating environment difficulty and underlying sovereign ratings of these markets, according to a Fitch Rating note. However, longer-term, increased geographic diversification may support banks’ business profiles and growth prospects and financial performance stability.
In the rating note, Fitch said large Nigerian banks are transitioning into regional financial services providers by leveraging their developed domestic business models and franchises, supported by enhanced governance practices and risk management capabilities.
It said barriers to entry and competition from incumbents in new, mostly frontier, markets are relatively low and the exits of long-established international banks from the region provide significant growth opportunities, the rating note stated.
“We believe Nigerian banks’ expansion strategies, which include greenfield and M&A investments, are credible”. United Bank for Africa’s (UBA) and, to a lesser extent, Guaranty Trust Holding Company Plc.’s (GTCO) strategies are to establish fully-fledged banking subsidiaries, weighted towards corporate banking and treasury.
UBA has by far the largest regional presence. FBN Holdings Plc (FBNH) and Zenith Bank Plc.’s (Zenith) focus is also mainly on corporate banking, which is highly competitive.
The rating agency noted that amidst rising risks in Africa’s markets, Nigerian banks also seeing significant opportunities in retail banking. According to Fitch, Access bank Plc, with growth fuelled by M&A activity, is focused on both retail and corporate banking.
It said Access bank Plc is ambitiously targeting a 30% contribution to gross revenues from its regional operations in the medium term. The Central Bank of Nigeria (CBN) requires banks’ non-banking subsidiaries to be held separately under group holding companies.
Non-banking subsidiaries offer diversified products including payments, insurance and pension funds which have significant upside potential. Despite the global economic slowdown, SSA GDP is estimated to grow by around 4% in 2023 compared to global growth of just 1.4%.
Opportunities for banking and financial services can be significant, with African countries having large, young and under-banked populations. To tap the retail segment in particular, Nigerian banks will utilize proven digital offerings to acquire market share, reduce operating expenses and increase investment returns.
However, banks’ operations and risks remain concentrated in Nigeria, and regional growth and diversification do not necessarily provide ratings uplift. Nigerian banks with sizeable exposures outside their home market can be negatively affected by exposure to low-rated countries, such as the Republic of Congo (‘CCC+’), Mozambique (‘CCC+’), Ghana (RD) and Zambia (RD).
However, the operating environment (OE) score can be supported by exposure to higher-rated OEs, such as Cote d’Ivoire, South Africa and Namibia (all rated ‘BB-’).
Banks’ risk profile scores can be negatively affected by market risks, especially FX risk. The regional expansion brings significant operational risks and requires robust processes and systems to mitigate human error, fraud and cyber-related risks.
Business profiles can be notched up when regional diversification directly benefits the franchise, market position and performance stability, or notched down when expansion strategies fail to deliver stated objectives.
Nigerian banks typically lend to the government or invest in government securities in countries where they have a footprint, making subsidiaries’ creditworthiness closely linked with domestic sovereigns.
Fitch said credit profiles of the latter are very weak in a number of African countries. Regional expansion for Nigerian banks may benefit profitability and internal capital generation, with increased risk-weighted assets usually tempered by zero-risk weighting for government exposures.
Conversely, uncontrolled growth may exert near-term pressure on capital. Regional subsidiaries that gather low-cost, local-currency and US dollar-denominated deposits can help diversify the parent group’s funding base and lower overall funding costs.
Subsidiaries can also support the groups’ liquidity when US dollar funding is fungible. There have been rising unpriced risks across Africa region following disruption in the global economy exacerbated by Russia-Ukraine war in the last 12 months. #Nigerian Banks Face Credit Risks from African Expansion