Nigerian banks' digital transformation should continue to support their performance in 2023 thanks to the associated increase in transaction income, S&P Global Ratings said in report titled "Nigerian Banking Sector 2023 Outlook: Resilience In Turbulent Times,. The adoption of digital channels has supported banks' efficiency and service delivery and shielded their earnings from volatility.
"In addition, Nigerian banks can reprice their assets quickly, and are generally funded by low-cost deposits, which is beneficial in a context of tightening monetary policy," said S&P Global Ratings credit analyst Samira Mensah. "At the same time, cash reserve requirements rose to 32.5% in September 2022, and will likely undermine net interest margins and earnings in 2023," Ms. Mensah added.
Moreover, Nigeria's inclusion in the Financial Action Task Force's grey list could raise transaction costs for the sector and exacerbate already severe foreign-currency shortages. Bank ratings are constrained by the sovereign ratings on Nigeria because of the likely impact of sovereign stress on creditworthiness.
Another key risk for the sector is Nigeria's economic dependence on the hydrocarbon sector. Despite declining over the past years, the banking sector's exposure to the oil and gas sector is still material. Low oil production weighs on the oil and gas sector's performance and foreign-currency reserves. Lower foreign-exchange (FX) inflows and arrears payments to clear FX backlogs will sustain the pressure on the Nigerian naira exchange rate.