Returns at Nigeria’s top banks are running at levels that their European counterparts can only dream of, and the country’s biggest lenders are eyeing up an opportunity from the 60m citizens without bank accounts.
But according to Ronak Gadhia, an analyst for investment bank EFG-Hermes, the pool of investors who want to own Nigerian lenders is shrinking. “There used to be quite a few supporters,” he says. “Now, it’s very hard to get a client to pick up when you are calling to discuss Nigerian banks.”
Some investors are averse because of wider conditions in Nigeria. The country’s currency value is volatile, with a central bank that props up the naira, before sudden devaluations, as happened in March and July. Nigeria has currency controls, adding to investors’ concerns about unpredictability and getting their cash out.
When it comes to banks, the main source of investors’ caution, says Mr Gahia, is a belief that the average 19.5 per cent return on equity enjoyed by the big-six Nigerian banks in the first half of the year masks the true state of their finances and outlook.
The “cost of risk” for the six, which measures their credit charges flowing through banks’ income statements as a percentage of their total loans, was just 1.6 per cent for the first half of 2020, far lower than the 5.3 per cent EFG analysts predicted for the full year.
The low charges were at odds with the Covid-19 pandemic, which locked down Nigeria’s biggest states at the end of March and ended international and domestic flights, driving the country into its worst recession in more than a decade.
Nigeria, where the oil sector accounts for about 9 per cent of economic output, but about three-quarters of export revenues and nearly all foreign exchange, also had to deal with record low oil prices, caused by both the pandemic and an oil price war between Saudi Arabia and Russia.
There is an opportunity for banks to grow their business by tapping the population of adults in Nigeria without bank accounts
This article is part of Nigeria at 60, an FT special report published in the Financial Times on Thursday 29 October and online at ft.com/nigeria-60.