The level of concentration of Nigeria’s banking sector is enough to give investors cause for concern, as five banks control nearly 60% of the market.
In 2005 and 2009, excesses in non-performing loans and marginal trading led to balance sheet over-leveraging and saw the country gripped by financial crisis. Banks began to go bust and the Nigerian Stock Exchange (NSE) lost nearly half its value at the height of the crisis.
But sweeping reforms from the Central Bank of Nigeria (CBN) have helped revive the market with strict capital requirement levels, proper governance and a new regulatory framework put in place to avert the threat of a future crisis. This produced consolidation within the industry and banks began to merge to meet the reform requirements set in place by the CBN, leading to the creation of five super banks in Nigeria: Zenith, Access Bank, Guaranty Trust Bank, First Bank and United Bank of Africa.
Despite the risk from Nigeria’s overly concentrated banking sector, the scope for growth in this market should whet investors’ appetite. Post-crisis, consolidation has left the country with 22 healthy banks that are set to help shape the future of banking in the country in a way that could offset the might of the top 5 banks. Only 20% of Nigerians have bank accounts, while more than two thirds have never opened one. Yet analysts estimate the sector will achieve a compound annual growth rate (CAGR) of over 10% from now to 2015.
This firmly places the valuation of this industry at just under $170 billion, up from $117 billion in 2011. The big banks are focused squarely on winning business from government agencies and international investors; mid and small-sized banks have an opportunity to tap into Nigeria’s consumer class as a strategy for growth. The CBN recently announced the start of a Financial Inclusion Strategy as a way to ensure greater public access to financial services. This coupled with the implementation of Cashless Lagos scheme will drive up the number of future depositors and increase bank capital.
With more depositors, banks can begin to take greater risk and diversify their business lines into personal, small business and car loans, as the majority of current income stems from lending to large commercial outfits. These loans can help drive enterprise and boost Nigeria’s overall economy more broadly. Nigeria’s greatest asset is its people and with the scope to attract nearly two thirds of the population as potential customers, investors should take a top down approach on this sector and invest. Nigeria also has the Nigerian Insurance Deposit Corporation to safeguard deposits against bank runs. This will help Nigeria’s banking sector gain credibility with the millions of Nigerians who have never opened a bank account and has the potential to jumpstart society’s use of financial services.