Renaissance Capital: Credit Growth and Impact on GDP in Nigeria and Kenya
Tuesday, 05 June 2012
Nigeria: Discrepancy between the CBN and Banks’ Reported y/y Credit Growth

During the week of Renaissance Capital’s Third Pan-Africa 1:1 Investor Conference in Lagos, Nigeria, we questioned the discrepancy between the 50%+ year on year (y/y) credit growth numbers reported by the Central Bank of Nigeria (CBN) and the modest growth of 15-20% y/y reported by individual banks in 1Q12. The CBN attributed this discrepancy to the bonds issued by the Asset Management Corporation of Nigeria (AMCOM).

Among the measures taken to resolve Nigeria’s local banking crisis were the issuance of AMCON bonds, some of which were used to fill troubled banks’ capital hole and the remainder exchanged for the affected banks’ bad debt. Subsequently, some of the banks holding AMCON bonds chose to sell some of these bonds to the CBN, at a discount, to raise liquidity. The CBN recorded its AMCON holdings as loans to ‘other financial institutions’, which is included in the aggregation of claims to the private sector.

We do not think AMCON bonds tell the full story on credit growth. Only by issuing an amount of bonds exceeding the bad debt, the excess of which was used to fill troubled banks’ capital hole, can the AMCON bonds be counted as credit extension, in our view. Private credit extended in the year to March 2012 increased by NGN4.8trn. Our sub-Saharan Africa (SSA) banks’ analyst, Nothando Ndebele, estimates that NGN3.9trn of AMCON bonds have been issued since December 2010, of which about NGN1.5trn was issued to fill the capital hole. Most of these capital injections were done in 2H11 and the bond issuances in 4Q11.

However, a number of these bonds are still sitting on the banks’ books, partly because banks are only permitted to sell up a limited amount, mostly to settle interbank liabilities. Thus there has not been much selling. We therefore fail to see how AMCON bonds explain the significant expansion in credit growth, and the discrepancy between the CBN’s and individual banks’ credit growth numbers.

Finally, although the CBN records AMCON bonds as credit extension, we do not view this to be strictly so, as the cash the banks received in return for selling their AMCON holdings to the CBN was mostly parked in treasury securities and not lent.

Our bottom-up view tells us that credit growth in Nigeria remains weak. As we have failed to reconcile the discrepancy between the CBN and banks credit numbers, we have decided to take a bottom-up view on credit growth, as our SSA bank analyst’s coverage of the Nigerian banks accounts for about 80% of the sector (by asset size). Banks have reported that quarter on quarter loan growth remained weak in 1Q12, ranging from zero to 5%. This does not surprise us, given that the attractive yields on treasury securities (13.5% on the 91-day T-bill) leave little incentive for banks to lend to the private sector.

We note that the sale of AMCON bonds to the CBN implies that the banks have greater liquidity, thus we believe there is the potential for credit growth to improve in the short term. However, we think this will be at a measured rate. We expect private credit growth for 2012 to be in the region of 15-20%.

A disconnect between credit and GDP growth implies a limited impact on Nigeria’s real economy. The AMCON process has distorted credit growth since 4Q10 and is likely to do so until YE12, in our view. We expect credit growth to normalise in 2013, following the banking sector’s cleanup, recapitalisation and tightening of regulations, but in the relatively modest region of 20%. This is especially so given the current high interest rate environment in Nigeria.

The disconnect between Nigeria’s real economy and credit growth implies to us that a measured recovery will have a limited impact on Nigeria’s GDP growth. This was particularly evident when Nigeria’s private sector credit growth collapsed between 2008-2011, from triple-digit y/y growth to negative y/y growth in 1H11, but nevertheless had a limited impact on real GDP growth, which averaged 6.8% pa during the period.

We think this can be explained by the fact that the sectors that are driving growth have little exposure to credit. About 80% of Nigeria’s private credit goes to those sectors of the economy that account for only 23% of real GDP growth. This explains to us why the downside risks to GDP growth of a slowdown in credit growth are small. Agriculture, for example, is responsible for almost 30% of real GDP growth, but only 2% of credit extended goes to the agriculture sector. Two other important drivers of growth, trade and communications (and transport), which are responsible for 26% and 22% of growth, respectively, also receive relatively low shares of private credit – 11% and 10%, respectively. This disconnect between credit and real economic activity implies to us that our projection of a measured recovery in credit growth will have limited upside for Nigeria’s GDP growth.

Kenya: Credit Slowdown Will Have More Pronounced Impact on Growth
We expect a change in credit growth to have a more pronounced impact on Kenya’s economic growth than on Nigeria’s. This is because 80% of sectors that drive growth in the two countries are exposed to 50% of the credit extended in Kenya, compared with only 23% of the loans extended in Nigeria. As we expected, Kenya’s 11-percentage point hike of the central bank rate to 18% in 4Q11 that prompted a surge in interest rates, has tempered private sector credit growth, which slowed to 24.0% y/y in March 2012, from a peak of 37.2% y/y in September 2011. We expect y/y credit growth to slow to the mid-teens by YE12.

In Kenya, agriculture is the only sector where there is a wide divide between its contribution to growth (near 30%) and its exposure to credit (5%). However, this is common in the rest of the SSA region as well. On the contrary, trade’s exposure to credit (16%) and contribution to growth (19%) is near equivalent in Kenya. This implies that a change in credit growth has a material impact on economic growth, through trade. Trade’s significant exposure to credit is why we expect the slowdown in credit growth to subdue import trade and to help narrow the current account deficit.

In conclusion, Kenya’s economic activity is more susceptible, in our opinion, to a change in credit growth than Nigeria’s. We believe the projected slowdown in Kenya’s 2012 loan growth will thus have a more pronounced impact on economic growth in Kenya, than an equivalent credit slowdown would have in Nigeria. We forecast Kenyan real GDP growth of 4.6% in 2012, up from 4.4% in 2011.

Republished with kind permission by Renaissance Capital. For more information or the full report, please contact Yvonne Mhango on This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

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