Nigerian banks are entering a new phase after several years of unusually strong profits. Following large capital raises and a shift in economic conditions, the sector is settling into what analysts describe as a return to normal.
This view is reinforced by recent research from Renaissance Capital, which says the exceptional earnings growth recorded in 2024 and 2025 will be difficult to repeat.
In a January 16 research note, the firm said it expects most of the banks it covers—including Zenith Bank, GTCO, Access Holdings and UBA—to struggle to deliver earnings growth in 2026 comparable to their 2025 performance. The reason, it said, is a sharp change in the economic forces that boosted profits over the past two years.
This does not mean Nigerian banks are in trouble. Capital levels are higher, balance sheets are stronger, and the financial system remains stable. What is ending is an extraordinary profit cycle.
Why the Boom Years Are Ending
According to Renaissance Capital, the strong earnings of 2024 and 2025 were driven by conditions that were never likely to last. Interest rates were pushed to extremely high levels as the Central Bank fought inflation and stabilised the currency. This allowed banks to earn unusually large returns from lending and from investing in government securities.
At the same time, the naira depreciated sharply. For banks holding foreign-currency assets, this produced large foreign-exchange revaluation gains—accounting profits created simply by converting dollar assets into a weaker naira. Together, high interest rates and FX revaluation gains lifted profits to record levels. Renaissance Capital’s conclusion is blunt: those tailwinds are now fading.
Lower Interest Rates Mean Lower Profits
The research firm expects a clear shift in monetary policy in 2026. With inflation easing to around 15 percent by the end of 2025, the Central Bank is expected to begin cutting interest rates. Renaissance Capital forecasts a reduction in the Monetary Policy Rate of between 400 and 500 basis points over 2026.
In simple terms, this means interest rates will fall by about 4–5 percentage points. As rates come down:
Banks earn less interest on loans
Yields on Treasury bills and government bonds decline
However, banks will still be paying relatively high interest on deposits raised during the peak of the rate cycle. Deposit costs typically fall more slowly than lending rates.
This imbalance directly reduces profitability.
Stronger Competition for Deposits
Renaissance Capital also points to recapitalisation as a key pressure point.
To meet new capital requirements, banks have raised large amounts of equity through rights issues and public offers. But bigger balance sheets also require stable funding.
This has intensified competition for deposits across the sector.
Banks are offering higher interest rates and incentives to attract corporate and retail funds. While this improves liquidity and strengthens the system, it raises costs at a time when interest income is already under pressure.
The combined effect is a squeeze on margins.
The End of Easy Foreign-Exchange Gains
Another major boost to profits is disappearing. Renaissance Capital notes that foreign-exchange revaluation gains were a significant contributor to earnings during the period of naira weakness. Those gains were largely non-cash and driven by currency movements rather than business expansion.
With the naira now trading within a more stable range—analysts broadly expect the exchange rate to remain around ₦1,500–₦1,650 per dollar in 2026—those gains are no longer material.
Banks can no longer rely on currency depreciation to lift earnings.
Why Renaissance Capital Expects NIM to Decline
Renaissance Capital’s core warning is that NIMs will contract in 2026.
This is because:
Interest rates are expected to fall
Deposit costs remain elevated
Banks are unable to expand lending fast enough to offset lower rates, partly due to high cash-reserve requirements
In practical terms, banks will be lending at lower rates while still paying relatively high rates to attract deposits.
That shrinking gap is what analysts call NIM compression—and it is the main reason earnings growth is expected to slow.
What Is Net Interest Margin (NIM)?
At the centre of Renaissance Capital’s analysis is Net Interest Margin, or NIM.
In simple terms, NIM shows how much money a bank makes from lending.
Banks:
Earn interest when they lend money
Pay interest to customers who deposit money
NIM is the gap between the two.
If a bank earns a lot more from lending than it pays on deposits, NIM is high. If that gap narrows, profits fall.
More Capital, Smaller Returns Per Share
The research firm also highlights dilution as an unavoidable consequence of recapitalisation.
Banks have issued significantly more shares to meet capital rules. Even if total profits remain steady, those profits are now divided among a larger number of shareholders.
As a result:
Earnings per share decline
Return on equity falls
For investors, the headline profit number matters less than what each share earns.
What This Means Going Forward
Taken together, Renaissance Capital’s research points to 2026 as a transition year for Nigerian banks—not a downturn, but a reset.
With high interest rates receding and foreign-exchange windfalls fading, banks will no longer be judged by extraordinary gains driven by policy shocks or currency moves. Instead, performance will increasingly depend on the fundamentals: cost discipline, loan quality, the ability to generate cash earnings, and the depth of everyday businesses such as transaction banking and fee-based services.
In that environment, the distinctions highlighted in Renaissance Capital’s June 2025 analysis take on greater significance. While falling Net Interest Margins are expected to affect all lenders, banks that enter the new cycle with cleaner balance sheets and stronger cash profitability—such as GTCO, and to a lesser extent UBA—may be better positioned to absorb margin pressure, recapitalisation dilution, and slower earnings growth. Others, particularly those with higher forbearance exposure and weaker cash conversion, may find the adjustment more difficult.
Growth, in other words, is likely to be slower and less dramatic—but also more durable. The easy money phase is over. What replaces it is a more sober, more demanding test of banking quality.
Nigerian banks are not weakening—they are normalising. As Renaissance Capital’s research makes clear, the sector is moving away from extraordinary, one-off gains toward a more stable and realistic profit environment. The numbers may look less spectacular, but the foundations are stronger.
