Depending on the degree of operating environment difficulty and underlying sovereign ratings of these nations, Nigerian banks will incur near-term execution and credit risks from their presence in other Sub-Saharan African (SSA) markets, according to Fitch Rating.
Fitch stated in a statement dated Wednesday, February 22 that enhanced regional diversification over the longer term may support banks’ business characteristics, growth prospects, and stability of financial performance.
Large Nigerian banks are becoming regional financial services providers by utilizing their established domestic business models and franchises, underpinned by improved governance standards and risk management capabilities, it was stated, despite regulatory involvement and internal nation risks.
Barriers to entry and rivalry from established players in emerging, primarily frontier, markets, according to Fitch, are relatively low, while the exits of long-established international banks from the region provide significant growth opportunities.“We believe Nigerian banks’ expansion strategies, which include Greenfield and M&A investments, are credible,” It said.
It cited that United Bank for Africa (UBA)’s and, to a lesser extent, Guaranty Trust Holding Company (GTCO) Plc.’s strategies are to establish fully-fledged banking subsidiaries, weighted towards corporate banking and treasury. “UBA has by far the largest regional presence. FBN Holdings (FBNH) Plc. and Zenith Bank Plc.’s focus is also mainly on corporate banking, which is highly competitive,” it said.
It noted that Nigerian banks also see significant opportunities in retail banking. Access, with growth fuelled by M&A activity, is focused on both retail and corporate banking. Access is ambitiously targeting a 30% contribution to gross revenues from its regional operations in the medium term.
This comes after Access HoldCo unveiled a five-year expansion plan that will see it strengthen its influence both within and outside of Africa.Namibia, Ethiopia, Tanzania, and Rwanda will be added to the list of those African nations. Having a presence in Morocco, Egypt, Cote d’Ivoire, Burkina Faso, Niger, Senegal, the Republic of Benin, and Togo is another something it is interested in China, the United Kingdom, South Africa, Ghana, the Congo, and Cameroon are just a few countries that already have access.
Creating subsidiaries in the banking and non-banking sectors is often how Nigerian banks expand regionally, claims Fitch. The non-banking subsidiaries of banks must be held separately under group holding companies, according to the Central Bank of Nigeria (CBN).
Non-banking subsidiaries provide a variety of products, such as pension funds, payments, and insurance which have significant upside potential.It noted that despite the global economic slowdown, SSA GDP is estimated to grow by around 4% in 2023 compared to the global growth of just 1.4%. Opportunities for banking and financial services can be significant, with African countries having large, young, and underbanked populations. To tap the retail segment in particular, Nigerian banks will utilise proven digital offerings to acquire market share, reduce operating expenses and increase investment returns.
Fitch said despite the regional expansions, their operations and risks remain concentrated in Nigeria, and regional growth and diversification do not necessarily provide ratings uplift. It said Nigerian banks with sizeable exposures outside their home market can be negatively affected by exposures to low-rated countries, such as the Republic of Congo (‘CCC+’), Mozambique (‘CCC+’), Ghana (RD) and Zambia (RD). However, the operating environment (OE) score can be supported by exposure to higher-rated OEs, such as Cote d’Ivoire, South Africa and Namibia (all rated ‘BB-’).According to Fitch, banks’ risk profile scores can be negatively affected by market risks, especially FX risk. It said regional expansion brings significant operational risks and requires robust processes and systems to mitigate human error, fraud, and cyber-related risks.
Business profiles can be notched up when regional diversification directly benefits the franchise, market position, and performance stability, or notched down when expansion strategies fail to deliver stated objectives.Furthermore, according to Fitch, Nigerian banks frequently lend to or invest in government securities in nations where they have operations, tightly tying the creditworthiness of subsidiaries to home sovereigns. It was noticed that several African nations have relatively poor credit profiles for the latter.
“For Nigerian banks, regional development may boost profitability and internal capital creation, with higher risk-weighted assets often moderated by zero-risk weighting for government exposures. On the other hand, unchecked expansion can put pressure on capital in the near future. Regional subsidiaries can diversify the parent group’s funding source and reduce overall funding costs by attracting low-cost, local currency and US dollar deposits. When USD funding is fungible, subsidiaries can also help the groups’ liquidity, according to Fitch.
