Nigeria’s largest banks may be set to embark on a round of acquisitions as they seek to diversify their sources of income away from treasury bills.
According to consulting firm McKinsey, the proportion of Nigerian bank earnings derived from fixed-income securities increased from 14% in 2009 to 30% in 2019. But a collapse in treasury bill yields, coupled with inflation at its highest for three years, means there’s no prospect of positive real returns on the paper in the foreseeable future.
There’s no way back for Nigerian banks used to relying on high T-bill yields. That means they will be under to pressure to diversify and find new business lines in insurance, pensions and asset management, says Nkemdilim Nwadialor, equity research analyst at Chapel Denham Hill in Lagos.
Insurance is one business line would where income streams are less volatile than T-bill yields, she argues.
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At the end of December, Nigeria’s National Insurance Commission suspended the application of increased capital requirements for insurers. The deadline had already been delayed until September 2021, but the reprieve won’t last for ever. New capital requirements are likely to lead to weaker names being bought out, she says. “Now could be a good time to be getting into the insurance business.”
- Smaller insurance companies such as Staco Insurance and Niger Insurance are candidates to be bought out, she says.
- GTBank is in the market for a pensions provider, and Investment One, which GTBank previously divested, now looks like a good candidate for re-acquisition, she says.
- A lack of clear acquisition targets in asset management may lead to banks building their own businesses, she adds.
The ‘Great Financial Crisis’ starting in 2007 led to Nigerian regulatory requirements for different business lines within banks to be separated from their holding companies. “Now we’re seeing them return to these business lines,” explains Nwadialor.
The banking sector is now much stronger than in 2008 and is better able to finance different operations, says Nwadialor. But the financial services sector outside of banking has become weaker, she adds.
Lack of data
Part of the reason for ultra-low T-bill rates is that the central bank wants to promote lending to the real economy, says Nwadialor. But according to research from McKinsey partners Eyitope Kola-Oyeneyin and Mayowa Kuyoro in Lagos, regulatory changes have made pure Nigerian banking markets less attractive.
- The central bank’s cuts to electronic banking charges which took effect in January 2020 have hurt fee and commission income.
- Profitability is also restricted by the cash reserve requirement, which, at 27.5%, is among the highest in the world.
Nigerian banks will need to bolster their capital levels and grow capital faster than inflation and naira devaluation, the McKinsey research argues.
Opportunities remain for banks to develop scale across segments, by targeting small and medium-size enterprises or geographies such as the north of the country, which remains underserved, McKinsey says.
But Nwadialor argues that outside of the market for loans to salaried employees, banks are hampered by a lack of data on potential customers to allow them to assess credit risk. There are few credit bureaus that can provide data on people working in the informal economy, she adds.
Nigeria’s banks are seeking a boost and new strategies for a post-Covid world.