Report: Banks’ loan cut slows revenue growth

Collins Nweze

 

NIGERIAN banks have continued to face lower margins, increased competition, often encouraged by regulators and cut in loans which have led to drop in revenue, a new report by McKinsey’s Global Banking & Securities has shown.

The report from the global management consulting firm, explained that although Returns on Equity (ROEs) remain better on average in Africa (15 per cent in Kenya, 16 per cent in South Africa and 14 per cent in Nigeria – against a world average of eight to nine per cent), African banks face similar challenges with their global counterparts.

The McKinsey’s Global Banking & Securities practice Global Banking Annual Review 2019,  titled: ‘The Last Pit Stop? Time for Bold Late-cycle Moves,’  said these trends are highly evident in Nigerian banks, adding that even though banks in the country are performing in line with or better than most of their African peers on ROE, revenue growth has decreased from 23 per cent seven years ago to -1 per cent at present.

It said bank lending growth was at -5 per cent in 2018 compared to 27 per cent in 2014. The decreases in growth have resulted in a price to book ratio below 1 at 0.81 for the sector.

Partner, Head of Transformation in Africa and Head of Financial Institutions for West Africa in McKinsey’s Nigeria Office, Frederick Twum, said that in Africa, where there are typically between 15 and 25 banks per country – most of which have a universal banking model – customer choice is a major challenge and banks should focus on segments and products to reach critical size.

“In Nigeria, banks have an existential need for scale and efficiency as lending contracts (-5 per cent in 2018) and the market continues to consolidate with tier 1 banks accounting for more than 60 per cent of market revenues in 2018, up from 56 per cent in 2013.

The report added that given indications that the economic situation is likely to worsen in the short-term, banks are approaching the last likely pitstop in this economic cycle and need to rapidly reinvent business models and scale up inorganically.

Senior Partner and Managing Director of McKinsey’s Nigeria office,  Rogerio Mascarenhas, said there was much to play for in Africa. “While there are big differences between countries and customer segments, the continent as a whole is predicting growth of 8.5 per cent per annum in the banking revenue pool over the next few years – above the global average. However, banks on the continent are not exempt from the challenges facing the sector globally and clear strategic choices will be necessary if they want to survive tough economic times,” he said.

 

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