Banking earnings touched new highs in 9M’23, aided by material revaluation gains driven by the policy reforms on FX management that led to significant currency depreciation. In 2024, after-tax earnings may be relatively contained due to an expected tamer naira weakening (vs in 2023) as the Central Bank of Nigeria (CBN) intensifies efforts to stabilise the naira. Nonetheless, we see legroom for robust banking core-operating performance in 2024 due to the following reasons.
- Sustained hawkish disposition of the CBN – in line with recent guidance on sustained tightening until Q2’24
- Reinstatement of orthodox monetary practices and continued CRR normalisation.
- Robust trading and fixed income earnings on the resumption of OMO auctions and higher bank placement rates.
“Higher for longer” interest rate expectations supportive of margins
The effort of the CBN to rein in the 18-year high inflation drove interest rates to new highs in 2023, with pass-through to banks’ interest income and interest expense. Nevertheless, the net impact of the rising interest rate was positive, as the benefits from higher asset yields combined with a larger interest-earning assets base outweighed drags from higher cost-of-funds. The CBN’s guidance and body language indicate a sustained tightening stance in H1’24, suggesting higher fixed-income yields, which is positive for banks. From our sensitivity analysis, we assess that a 100bps increase in interest rate will likely translate into an average 8.5% rise in Interest income across our banking coverage (ex-ETI).
