Equity Analysis /

Nigeria Banks: Good fundamentals, but tricky technicals; Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Rahul Shah
    Ayodeji Dawodu
    Tellimer Research
    10 October 2019
    Published by

    We extend our models to 2023 and update our estimates to reflect the changing regulatory backdrop. Our earnings forecasts and TPs are lower, but ratings are unchanged – the sector still trades at attractive levels.

    Lowering medium-term estimates to reflect regulatory changes. We forecast a 6% CAGR for earnings in FY 19f-22f for the Nigeria banks we cover, with ROEs averaging 16.5% over the period. These numbers are below our previous estimates (11% and 18.6%, respectively) – we have cut our forecasts to incorporate the Central Bank of Nigeria’s (CBN) measures to force banks to lend and the government’s efforts to raise tax revenue. These lead us to anticipate lower gross asset yields, higher loan loss provisions, and higher effective tax rates. Pre-provision profits should rise c8% pa in FY 19f-22f (10% previously), supported by stronger asset growth, higher fees and commissions, and lower cost of funds.

    Fundamentals look good, but technicals could stay unfavourable. Our universe of Nigeria banks is down 20% YTD, despite steady profits and stronger capital and asset quality ratios (FY 20f PB of 0.4x vs frontier at 1.0x). Technical factors have outweighed fundaments for investors, in our view, due to weak policy/reform expectations, the volatile regulatory environment and uninspiring macro factors. We expect banks’ profitability to remain resilient, but weak sentiment toward Nigeria equities generally could keep valuations depressed, posing major downside risk to our Buy ratings.

    Top picks are GTB, Stanbic IBTC and Zenith, given the weak operating environment and regulatory risks in Nigeria, which have potentially negative implications for margins and asset quality. These banks, although also at some risk, should show greater resilience – GTB and Zenith’s relatively low cost/income ratio should cushion the impact of any margin weakness; and Stanbic should be supported by its profitable wealth segment. Our preferred banks also have superior NPL provisions coverage and capital ratios. Finally, we believe these banks are investors’ favourites, and could gain the most from any improved level of interest in Nigeria.

    Access, FBNH and Fidelity should record the strongest medium-term growth in pre-provision profits. Following a weak FY 19 for Access and FBNH, we expect pre-provision profits to pick up for both banks in FY 20-22, driven by operating efficiency gains following the Access-Diamond merger and completion of FBNH’s restructuring. We also expect lower funding costs and stronger core revenue for Access, given its enhanced retail franchise. Fidelity’s recent strong loan growth and rapidly growing digital banking franchise should drive its profits. That said, we are more cautious on this group of banks, which has higher asset quality risks in our view, and will likely generate ROE below our cost of equity estimates. 

    Other key downside risks to our outlook and recommendations relate to the macro and regulatory backdrop. Our analysis shows FBNH, FCMB and UBA are most vulnerable to regulatory risks, given their balance sheet structures (end-H1), high earnings sensitivity to margin changes, and relatively weak provisions coverage. Also, with three payment service bank licenses now issued in Nigeria, banks face more competition for retail and digital customers – FBNH, GTB and Zenith are our top e-banking plays