Acuity optimistic about banking sector performance on new credit and margin growth

Acuity Stockbrokers, emboldened by the robust financial performance recorded by the banking sector for the second quarter despite pandemic related disruptions to the broader economy, maintained its positive outlook for the sector in the remainder of the year and next year, premised on the pick up in the demand for credit and the improvement in interest margins. 

The Central Bank last week raised its key policy rates by 50 basis points and the statutory reserves ratio by 200 basis points effective from September 01, but expressed optimism over the continued momentum in private sector credit towards the remainder of the year while defending its 5.0 percent growth projected for the economy. 

The interest margins of banks, which already showed some improvement during the first six months of the year due to re-pricing of deposits under lower interest rates, could further receive an impetus from the slight increase in lending rates following last week’s decisions taken towards tightening monetary policy, which in turn drained a bit of banking sector excess liquidity. 

“Banks shine in 2Q 2021 and expected to continue into 2022,” said the research arm of the equity brokerage firm in its quarterly results update issued early this week. 

“We maintain that credit growth would pick up during FY21H2 along with the recovery of the economy (although delayed by few months due to Covid-19 third/fourth waves),” it added. 

“Stronger economic recovery expected in FY22 and a possible increase in market interest rates could boost NIM and margins,” the report further said. 

The banking sector has been resilient throughout the pandemic partly due to the regulatory relief provided to borrowers and the sector alike on their liquidity and capital parameters, which helped them 
to emerge even stronger than before. 

Although the reported non-performing loans may mask the true nature of problematic loans due to the payment holidays and the restructuring of facilities, banks have largely weathered the pandemic induced challenges on their asset quality. 

They built massive amounts of excess liquidity and bolstered capital since the onset of the pandemic as people and firms stockpiled cash in banks while they went on a capital raising binge to build capacity to meet the heightened demand for private credit of which the momentum blunted during the virus resurgence since April this year. 

Still, banks have seen robust first six-month growth in their loan books while the private sector credit has grown well over 12 percent, surpassing the whole of credit growth during 2020 and 2019. 

However, the pandemic remains a big hangover over the prospects of the sector and the broader economy, as more broad based and tough restrictions could dampen incomes and cash flows of its borrowers, specially of small businesses, affecting their ability to service their facilities regularly and thereby souring key performance indicators of banks.