WED, JANUARY 16 2019-theG&BJournal-The two-tier nature of Nigeria’s banking sector will be amplified by the merger of Access Bank and Diamond Bank, which will result in the five largest banks having more than 60% market share measured by assets, Fitch Ratings says.
The merger, due to be completed by end-June, is set to create Nigeria’s largest bank, with about 29 million customers and 15% of sector assets. The market is already dominated by a few large banks, with smaller banks tending to carve out niche positions focused on individual segments.
Large banks typically have higher ratings than small ones as they tend to have stronger financial profiles and more resilient business models. Nigeria’s largest banks have generally been more resilient to operating environment shocks, helped by their better funding and liquidity profiles, and higher earnings, which support stronger capitalisation.
This was demonstrated in 2016-2017, when three large banks (Access, United Bank for Africa and Zenith) were able to access the Eurobond market when there were severe foreign-currency shortages in the country. Fidelity was the only small bank to tap the market and did so at a relatively high cost. Large banks can also attract foreign-currency deposits through their international operations and trade finance activities.
Nigeria’s larger banks are better placed to attract and retain retail deposits given their stronger brands and extensive branch networks. This helps their funding stability and keeps down their funding costs – an important differentiator in a sector where cost-to-income ratios are relatively high, averaging about 65%. Lower funding costs contribute to stronger profitability among larger banks, on average.
However, larger size does not shield against significant asset-quality problems. Most Nigerian banks, regardless of size, have suffered from high credit losses in recent years, particularly from their exposure to the oil and gas sector, which accounts for about 30% of the sector’s loans. These problems stemmed from sharp falls in oil prices and, in some cases, banks’ loose underwriting standards. High non-performing loan ratios, low reserve coverage and a high proportion of restructured loans continue to weigh on banks’ credit profiles and asset quality remains a key rating sensitivity for all Nigerian banks.
We do not expect the Access/Diamond merger to herald further consolidation. Nigeria’s banking sector has become concentrated through two waves of consolidation since 2004, when there were about 90 banks. There are now only 21 banks, a modest number to serve Nigeria’s population of about 196 million and its rapidly growing economy. The Access/Diamond deal was driven by Diamond’s precarious financial position and the opportunity for Access to expand its franchise and benefit from economies of scale. Fitch Ratings-London.
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