Easing Rates, Rising Costs To Squeeze Nigerian Banks’ Profit— S&P

Nigerian banks are expected to come under mounting pressure in 2026 from easing interest rates, rising regulatory costs and stricter capital requirements, even as the sector is forecast to remain profitable, according to a new industry outlook by global ratings agency S&P Global.

In its Nigerian Banking Outlook 2026, S&P said the combined impact of lower interest rates, the end of regulatory forbearance and higher capital thresholds will squeeze net interest margins and weigh on returns across the banking sector, marking a shift from the exceptionally strong profitability recorded in recent years.

Despite these challenges, the ratings firm said Nigerian banks are likely to preserve positive earnings, supported by diversified income streams, continued growth in transaction-based revenues and strengthened capital buffers.

“We anticipate Nigerian banks will prove resilient and capable of preserving positive profitability in 2026 despite regulatory headwinds,” S&P Global said.

The agency projects that the sector’s average return on equity will decline to between 20 per cent and 23 per cent in 2026, from an estimated 25 per cent in 2025. Return on assets is also expected to ease to around 3.0–3.1 per cent, compared with 3.3 per cent in the previous year.

“Profitability will normalise as capital issuance increases equity bases, while margins come under pressure from lower interest rates,” the report noted.

Although borrowing costs have begun to moderate, S&P said interest rates are expected to remain high enough to support earnings. However, average margins are forecast to compress by between 50 and 100 basis points in 2026, reflecting the combined effect of lower yields and higher operating costs.

Banks are expected to continue benefiting from strong returns on government securities and access to low-cost customer deposits.

At the same time, fee and commission income is projected to remain a key earnings driver as retail banking expands and transaction volumes rise, particularly through digital payments, agency banking and other technology-enabled services.

“Growth in net interest income will be primarily driven by fees and commissions linked to digital payments, retail services and the expansion of agency banking,” S&P said.

Operating expenses are expected to stay elevated, largely due to regulatory charges. The Asset Management Corporation of Nigeria (AMCON) levy, set at 0.5 per cent of on- and off-balance sheet assets, is estimated to account for 15 per cent to 20 per cent of total operating costs for Nigerian banks.

Industry data show that the cost burden is already weighing on earnings. Analysis indicates that major lenders paid a combined N442bn in AMCON levies in the first half of 2025, representing a 34 per cent increase from N330bn in the same period of 2024.

This rise came as profits were pressured by higher funding costs, slower loan growth and a sharp decline in revaluation gains.

On capitalisation, S&P expects Nigerian banks’ buffers to strengthen as lenders complete large-scale capital-raising programmes to meet new regulatory requirements set by the Central Bank of Nigeria (CBN).

Under the revised framework, which takes effect on March 31, 2026, banks with international licences must maintain a minimum capital base of N500bn, while those with national licences are required to hold at least N200bn, a significant increase from the previous minimum of N25bn.

S&P said rated banks have collectively raised about N2.3tn so far, close to its estimated total requirement of N2.5tn.

Of the 10 rated commercial banks, which together account for roughly 80 per cent of total banking system assets, nine already meet the new capital thresholds.

While the capital boost is expected to enhance loss-absorption capacity and strengthen resilience under the Basel II framework, S&P warned that smaller lenders could face heightened pressure under the tougher regime.

The ratings agency expects some smaller banks to pursue mergers, acquisitions or strategic changes to their business models in order to comply with the new capital rules, raising the likelihood of consolidation within the sector.

“We expect banks to continue to meet their regulatory capital requirements over the next 12 months, supported by earnings and recent capital raises,” S&P said, adding that consolidation risks remain elevated for weaker institutions.

S&P noted that Nigerian banks are entering a more challenging operating environment in 2026, with easing rates and rising costs weighing on margins, but noted that stronger capital positions and diversified income streams should help the sector absorb the pressure.