Renaissance Capital: Portfolio rebalancing to drive banking stocks

The banking sector in Nigeria has had an eventful year with significant highlights and challenges. Despite the NGX being down 6.8% year-to-date, there have been key developments that are shaping the industry. Olumide Sole, the Head of Financial Institutions Research at Renaissance Capital Africa, highlighted the major themes and trends that have influenced the banking sector this year. One of the notable trends has been the capitalization drive within the sector. Banks have raised capital and issued additional shares, leading to a dilution in stock value. However, the underlying resilience of banks is evident in the triple-digit growth in earnings per share recorded by major banks. This growth is expected to offset the dilution and drive future performance. Interest income has been a major earner for banks, driven by the Central Bank of Nigeria's (CBN) efforts to combat inflation through a hiking cycle. Banks have taken advantage of the high-interest rate environment to reprice assets and expand their loan books. The translation of foreign currency loan books has also contributed to the loan book's significant expansion, with some banks seeing over 50% growth in their loan books. The concentration of lending remains in traditional sectors such as oil and gas, followed by manufacturing and others. Portfolio rebalancing has been a key strategy for investors looking to adjust the weight of their portfolios to meet desired outcomes. Moving forward, top banks like Access and Zenith are expanding their footprints beyond national borders. Access Bank has shown strong growth prospects with high geographical diversification, including recent acquisitions like Afesia Bank. Zenith and GT Bank have seen significant improvements in cash earnings, supporting dividend payouts. Looking ahead to 2025, recapitalization efforts are ongoing, with expected approvals influencing future performance. The outlook for the Naira in 2025 suggests a deceleration in inflation to around 25% and trading at 2,100, which could impact bank earnings positively but at a lower scale compared to previous years. Overall, the banking sector is poised for growth and resilience in the face of changing market dynamics. Analysts like Olumide Sole are optimistic about the sector's future prospects, emphasizing the importance of strategic portfolio management and expansion initiatives.