Equity Analysis /

Ghana Banks: Q3 19 preview – Lower cost pressures offer tailwinds

    Nkemdilim Nwadialor
    Nkemdilim Nwadialor

    Equity Research Analyst, Financials

    Ayodeji Dawodu
    Olabisi Ayodeji
    Tellimer Research
    17 October 2019
    Published by

    Unaudited 9M 19 results for Ghana banks should be released over the coming weeks. In this report, we highlight our expectations for Q3, following strong earnings growth in H1 19 (see our Q1 19 and Q2 19 earnings wrap).

    We expect earnings to increase by a median of 8% yoy for our Ghana banks coverage, mostly supported by strong loan growth, higher non-interest income and lower cost of funds. Pre-provision profits should expand by 17% yoy as we expect most banks to improve operating efficiency, resulting in lower cost/income ratios. On the downside, we anticipate a decline in asset yields and higher net impairment charge for most banks.

    Our top pick remains GCB (Buy with ETR of 159%) due to: 1) its strong balance sheet position; 2) the potential to lower its cost of funds as expensive deposits acquired from the UT Bank and Capital Bank consolidation are repriced; 3) its attractive valuation, with a 2020f PB of 0.7x – a 25% discount to Ghana peers. Our Ghana banks coverage trades at FY 20f PB of 1.1x vs 0.9x for frontier banks. We maintain our Buy ratings on most of the sector and Hold on SCB (due to its weak asset quality). See our recently updated earnings forecasts and valuation estimates here: Macro conditions support strong earnings outlook; Buy

    Ecobank Ghana should outperform on yoy earnings growth (up 21% yoy), as we expect the bank to record a decline in net impairment charge, unlike peers that will likely see the cost of risk trend higher yoy. Better operating efficiency should also serve as a positive. For CAL and GCB, major tailwinds include lower cost of funds and improving cost/income ratios, which should contribute to yoy earnings growth of 12% and 13%, respectively. SCB should lag peers, based on our estimates, with a 44% yoy decline in net income, weighed by higher net impairment charges. 

    Loan growth might underwhelm for most, but NPL ratios should moderate further. We expect strong loan growth of 16% qoq for CAL as it continues to roll out its retail/agency banking platform, while we expect weak trends for the rest of our coverage (-2 to +6% range), particularly EGH, which should lag all peers due to its weak capital ratios. We also expect the median NPL ratio for our coverage to shrink by 34bps qoq to 9.8% driven by write-offs, especially for SCB. Due to a slight uptick in CAL and GCB’s NPL ratios in H1 19, we expect both banks to record higher net impairment charges, which could weigh on profits.