Equity Analysis /
Global

Banks: FY 19 results preview – falling risk costs

  • We expect 14% median profit growth across our coverage of 91 banks in 20 markets

  • We expect banks in Argentina (higher margins/securities income) to post the strongest earnings growth

  • Versus consensus, we are positive on Saudi Arabia and Argentina, but cautious on Sri Lanka and Pakistan

Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
13 January 2020
Published byTellimer Research

We expect 14% median profit growth across our coverage of 91 banks in 20 markets, driven by a 10% higher top line and an 11% rise in pre-provision profit. ROE should come in at 16.1% for the year. We expect banks in Argentina (higher margins/securities income) to post the strongest earnings growth. Sri Lanka will be one of the few markets to post a decline (higher risk costs). Versus consensus, we are positive on Saudi Arabia and Argentina, but cautious on Sri Lanka and Pakistan (see Figures 1 and 2 of the full report).

FY2019f net profit by country (yoy growth)

Source: Tellimer Research, Bloomberg. (Argentina +122%)

Expected outperformers by market: GGAL AR and BBAR AR should see rapid bottom-line growth on higher interest margins/ securities income. In Saudi, we see smaller names BJAZ AB and ALBI AB posting better profit growth given their greater lending dynamism. MEBL PA is a beneficiary of superior balance sheet growth and margin expansion. CITYBA BD’s profits should bounce back from a weak 2018 base (high provisions). In contrast to last year, H2 should be profitable for SBMH MP (lower impairments). ADIB EY benefits from margin expansion and cost control. CTG VN’s 2018 profits were crimped by high credit costs (Figure 3, Table 1).

Solid momentum will continue into 2020. We forecast median profit growth of 14%, with Mauritius (lower risk costs) and Pakistan (higher margins) leading the way. ROE should rise to 16.3%. Further details here.

Favoured banking markets: Egypt, Pakistan, Nigeria and Vietnam, while among smaller markets we like Ghana and Sri Lanka. Egypt banks should see strong volume growth, with lower interest rates supporting capex. Pakistan banks should enjoy ROE expansion as margins rise. Top quality Nigeria banks are trading at big discounts even as asset quality improves. Vietnam banks benefit from a strong macro backdrop, which has cleared legacy NPL issues and is supporting good loan growth.

Top large-cap picks: GUARANTY NL should deliver industry-leading ROE and has the quality to successfully negotiate regulatory uncertainty. MCBG MP should keep seeing good growth from its international trade and structured finance loans. UBL PA will realise higher margins with a superior risk-reward profile to peers. VPB VN should see continued loan growth at FE Credit; risk costs could fall given legacy NPLs are now fully provisioned.

Top small-cap picks: BRAC BD profits from superior funding, asset quality and margins; its bKash arm dominates in Bangladesh mobile money. HNB SL should deliver better loan growth and asset quality, given its superior capital and provisioning base. CIEB EY should maintain its superior ROE to peers, supporting its high dividend payout. GCB GN has scope for funding and operating cost synergies plus good loan growth prospects.

Valuations appear undemanding, with a sector median of 1.0x 2020f PB, 5.6x PE and 5.2% DY. Mid-cap Egyptian banks (2.8x 2020f PE and 0.4x PB for 19.7% ROE) and tier 1 Nigerian banks (3.8x 2020f PE and 0.6x PB for 16.0% ROE) stand out from a valuation perspective.

Risk factors: 

Upside: Sector consolidation; structural reform; better consumer confidence; more infrastructure investment; fiscal blockage removal. 

Downside: Macroeconomic deterioration; political/ geopolitical risk; tougher financing conditions; rising inflation; falling commodity prices