Nigeria’s banking sector is the second-largest in sub-Saharan Afrifter South Africa. Total assets in August 2019 amounted to N39.6 trillion although some small and mid-sized Nigerian banks are still struggling to rebuild capital levels. This is following a decline in oil prices which led to a foreign-currency shortage. The 2016 recession also affected banks as businesses were finding it tough to repay loans.
Despite the various challenges caused by the COVID-19 pandemic, the banking sector has maintained credibility. The sector has taken the lead in long-term growth. According to the Nigeria Stock Exchange, Nigerian banks recorded differing outcomes in profit before tax in H1 2020. Among the 13 banks listed on the Nigeria Stock Exchange, 8 banks recorded an increase in profit before tax while 5 banks recorded a decline in profit before tax. The top five banks with the highest profit before tax were Zenith Bank (N114.12bn), GT Bank (N109.71BN), Access Bank (74,31bn), ETI (N64.13bn), and UBA (57.13bn). The three banks with the least profit before tax were Unity Bank (N1.12bn), Wema Bank (N1.73bn), and Sterling Bank (N5.68bn). Wema Bank recorded the topmost year-on-year decline of -33.72% in profit before tax while FCMB recorded the topmost growth of PBT at +25.51%.
The diverse performance of banks in Q2 2020 shows the variety of their balance sheet structure. It also reveals how loans and advances were crucial to the Central Bank of Nigeria’s mandatory 65%. The gross earnings of the majority of banks listed on MSR were unaffected by the coronavirus pandemic. Only three banks recorded a fall in their gross earnings in H1 2020. The banks include Sterling Bank -2.8%, Wema Bank -6.6%, and ETI – 3.3%.
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Earlier before the COVID-19 outbreak, some banks had realized the necessity in maintaining profitability and sustainability. They saw the need for restructuring their processes to thrive in the digital age. The need for operating cost to decline as industry consolidation was rather becoming unavoidable to enhance economies of scale and scope. Larger sized institutions would be at a competitive advantage as they attract high net worth corporations and individuals with higher credit ratings. Smaller banks are left with the lowest of the loan bucket which constitutes a risk. This means smaller banks have to deal with larger credit risks, higher impairments, and lower profitability. The low balance sheet positions of smaller-sized banks were not a result of the virus. This is the natural outcome of market logic. Small cannot be seen as beautiful when it comes to finance.
Some banks had figured this earlier and established buffers into their operations to help maintain stability from sudden shocks to the lending system. Earlier in 2019, Access Bank as part of its five-year strategic growth plan merged with Diamond Bank. The merger brought about the creation of Nigeria’s largest lending institutions asset size. The most commendable was the bank’s ability to maximize opportunity through the merger to strengthen its digital foundry and sandboxes and redesigned its institutional skill sets and workforce requirements.
The redesign of the bank’s business model required workers to be educated in the new competitive banking landscape. For a bank like Access Bank, this necessarily required a redesign of its workforce architecture. This means some jobs had to shrink numbers while others grew. The paradigm shift was almost the same for UBA which had to lay off over a thousand employees in January 2020 and ETI laid off a higher part of its older workforce and removed staff on contract in the middle of 2019.
Presently, there is a new customer environment that requires less physical interaction and a higher demand for digital user experience and interaction (UX/UI). There’s also a need for greater fluidity in customer loyalty as millennials are constituting a larger segment of the bank’s customer base, although they do not make for the largest demography by nominal deposit value.
Nigeria’s wide informal sector still lacks digital sophistication. The unstructured data supplementary service data (USSD) codes have been largely successful in achieving the mobile payment solution needs of retail customers. However, small enterprise solutions have not been fully explored.
The instability of crude oil prices is a call for banks to gradually cut down their exposure to the oil and gas sector. There should be a focus on the power sector also. Banks may require the building of stronger operational buffers to withstand the uncertainty of the near future. They must also work on expanding the size of their shareholder’s funds, the larger the funds, the more resilient the bank would seem to be. This means that with the wrapping of 2020, there might be mergers and acquisitions (M&As) to help strengthen corporate balance sheets in 2021.
We’re in the age of innovation and creativity. This requires that Banks begin to explore the area of digital capacity through implementing ways of creating efficient solutions for the large informal sector as well as micro, small, and medium-sized businesses (MSMEs) in the country. They should also be ready to withstand future economic shocks through strategizing ways for tactical survival even as the second wave of the COVID-19 pandemic knocking at the door.