Flash Report / Nigeria

Nigeria banks hit by another central bank debit; we see a pattern!

  • Debit comes days before the CBN’s FX auction, suggesting that the CBN is trying to limit the banks' FX demand
  • FCMB, UBA and FBNH continue to be the most vulnerable; although UBA was not hit by this recent debit
  • Cost of funds and lending costs are expected to rise on account of this, counteracting the MPR cut we saw last month

The Central Bank of Nigeria (CBN) is at it again. It has debited 26 banks a total of NGN216.1bn, attributed to the CRR (Cash Reserve Ratio) compliance requirement. Recall that two weeks ago, the CBN debited banks cNGN459.7bn for the same purpose.

This is the third CBN debit in 2020, bring the total CBN debits for the year to NGN2.08tn: 1) CRR and LDR infringements in April 2020 of NGN1.4tn; 2) another CRR debit of NGN460bn; and now 3) the most recent CRR debits of NGN216bn.

CBN penalties for Nigeria Banks so far this year

Our usual suspects FBNH and Zenith have been on the receiving end of all three central bank penalties in 2020. FBNH has had 4% of its deposits (using Q1 20 figures) debited YTD, while the figure is a bit higher for Zenith at 5%.

CBN debits also serving as quasi capital controls

This latest CRR debit comes days before the CBN’s foreign exchange auction (as with the last two CBN debits) which suggests a pattern to these otherwise spurious debits. Speaking with the banks, we get the sense that the CBN is trying to discourage them from making huge demands at the FX auctions, so by making their available balances smaller, they limit the banks’ ability to pressure the CBN on the FX front. A recent article by Business Day puts Nigeria’s FX backlog at US$7bn, which combined with failing reserves (now at US$36bn, down by US$9bn year to date) make a compelling argument for the banks’ claims of FX shortage. The Naira has since depreciated to NGN386.5 at the I&E window and NGN455 to the US dollar on the parallel market.

We maintain our Buy recommendations on seven of the eight Nigerian bank stocks in our coverage, the exception being FCMB where we have a Hold. We will be revisiting our earnings forecasts and equity valuation to incorporate the increased operating pressure and regulatory risks.


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Flash Report / Kenya

Kenya: Restructured loans escalate as Covid-19 bites; negative for banks

  • Kenya banks have restructured a total of KES360bn in loans as at June 2020
  • This is negative overall for banks because of the risk of these newly restructured loans defaulting on payments later
  • We expect banks’ asset quality to continue to weaken in Q2 20
Faith Mwangi @
Tellimer Research
17 June 2020

According to the Treasury Cabinet Secretary, Kenya banks have restructured a total of KES360bn in loans as at June 2020. This represents 13% of total loans and is an increase from the 9.6% reported by the Central Bank of Kenya in April. Of these, personal household loans accounted for 53% of total loans restructured against a backdrop of continued job losses and pay cuts as well as shutting down of key employment sectors including tourism and horticulture from the Covid-19 outbreak. This is negative overall for banks as the escalating restructured loans may end up defaulting in the long term – the current restructuring measures may only be a stop-gap in the short term.

In addition, since the Central Bank of Kenya is overseeing the restructuring of loans and only granting them where the borrower has been negatively impacted by Covid-19, restructured loans would then represent potential asset quality weakness in the future. This is especially so if the economic pressure worsens, impacting the ability for loans to be repaid under the restructured terms. Overall, this would be of considerable risk to banks as increases in cost of risk would negatively impact earnings.

Although the Treasury Cabinet Secretary did not provide a breakdown of the full figures for restructured loans in June, we have relied on the central bank’s most recent figures for April and individual banks’ reported numbers for Q1 20 for our analysis (see full report).

One of our main concerns is that across banks, there seems to be no uniformity on how the restructured loans are treated. At present, the non-uniform nature of reporting has meant that some banks have downgraded the loan quality ranking of the restructured loans while others have kept it the same. There have also been no clear-cut criteria on how restructured loans are ranked in the different IFRS 9 stages. However, given how the pandemic developed towards the end of Q1 20 in Kenya, we expect Q2 20 numbers to have more uniform reporting as most restructurings were done within Q2 20 and because the central bank has been offering guidance to the banks on how to treat the restructured loans.

The overall industry NPL ratio was 13.1% as at end-April 2020 compared to 12.5% in March 2020, according to the Central Bank of Kenya. The top 7 banks (which account for c63% of total loans) had restructured 7% of loans at the beginning of April, and 3% in March.


 
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Macro Analysis / Kenya

Kenya cuts policy rate, slashes growth forecast on Covid-19 damage

  • Revised growth forecast still higher than World Bank's 1.5%, but lower than parliamentary projections
  • Rate cut positive, but increasing loan accessibility remain low due to Covid-19 impact on businesses
  • About 3% of industry loans now restructured due to negative Covid-19 impact
Faith Mwangi @
Tellimer Research
30 April 2020

The Central Bank of Kenya cut its benchmark lending rate by 25bps to 7.0%, in line with expectations, at the meeting on Wednesday. According to the Bank, the cut was in light of the continued grim outlook on the economy amid the Covid-19 pandemic. So far, since the first Covid-19 case was reported in Kenya, the country has had 384 confirmed cases, 129 recoveries and 15 deaths. 

While the latest rate cut is positive, its intended impact of increasing loan accessibility may remain low with the business environment hampered by curfews and lockdown measures. GDP growth projections have also been revised down to 2.3% from 3.4% previously. The new projections are lower than the 2.8-3.2% forecast by Kenya's parliamentary budget office, and higher than the 1.5% growth (and 1% contraction in a worst-case scenario) by the World Bank. 

Since the last meeting where the regulator cut the policy rate and the cash reserve ratio, the committee noted that 43.5% of funds released into the banking system were utilised mainly by tourism, real estate, trade and agriculture sectors. As of 18 March, restructured loans amounted to KES81.7bn (c3% of total industry gross loans as at January 2020). According to the regulator, restructures were mainly in Tourism, Restaurants and Hotels (31%); Real Estate (17.2%); Building and Construction (17.0%) and Trade (12.4%).

Key highlights from the central bank meeting 

  1. Current account deficit is expected to remain at 5.8% in 2020. This is based on lower oil imports, which are expected to offset the expected reduction in remittances. Key risk on this projection is the fall in horticultural exports and tourism services. Although the flower industry is starting to see some demand, it is unlikely that these receipts will suffice. 
  2. Sector NPL ratio stood at 12.5% in March compared to 12.7% in February. The improvement was on higher loan growth within the quarter. We believe this respite is temporary as the impact of Covid-19 is expected to filter through the numbers in Q2 20. Though the regulation to allow restructuring of loan terms will soften the impact of NPL formation, we still expect asset quality to continue declining. 
  3. Private sector credit grew 8.9% yoy. Sectors that boosted growth were manufacturing (17%); building and construction (9.5%); trade (7.8%); transport and communication (7.1%); and consumer durables (24.1%). 
  4. Inflation is expected to remain within the target range (2.5% to 7.5%) in the near term. The regulator's outlook is hinged on lower oil prices, recent reduction in Value Added Tax, and favourable weather conditions. We believe there is a risk of higher inflation figures as the country faces a likely food crisis from the locust invasion, which has already caused a 1.5% hit on GDP and continued disruption of the food supply chain with market closures implemented due to Covid-19. 

 
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Equity Analysis / Global

Emerging Market banks: Assessing dividend vulnerabilities

  • Central banks in Vietnam, Bangladesh, Pakistan, Morocco and Ghana have restricted the dividend payouts of their banks
  • We think banks in Sri Lanka, Russia and the GCC could also prove vulnerable to dividend cuts
  • Place to hide? We highlight ten high-yielding banks in our coverage with more defendable dividends
Rahul Shah @
Tellimer Research
12 May 2020

Bangladesh Bank, the country’s central bank, announced some restrictions today on dividends that can be paid by the country’s commercial banks. This follows an edict by Morocco’s Bank al-Maghrib yesterday, with the regulator asking commercial banks to halt dividend payments. We note that similar announcements were made by the State Bank of Vietnam and State Bank of Pakistan previously.

Table 1: New central bank-imposed dividend restrictions in selected EM, FM 

Country
Comments

Bangladesh

CAR-based dividend restrictions (capped at BDT1.5/share)

Ghana

Banks mandated not to pay dividends for 2019 and 2020

Morocco

Banks urged to withhold dividends for 2020

Pakistan

Dividends temporarily suspended for Q1 and Q2

Russia

Central bank encourages banks not to pay 2019 dividends

Uganda

Dividends payments deferred for 90 days (from Mar 2020)

Vietnam

Cash dividend payments suspended

Source: Central banks, IMF, Tellimer Research

Why dividends are under threat

The main rationale for all these regulatory announcements is the likelihood of higher provisioning needs as the global recession drives an increase in borrower defaults. In addition, many banks in the aforementioned markets are typically thinly capitalised. In Figure 1 below (taken from our report: The EM and FM banks best able to cope with weaker loan quality), we highlight the capacity of banks to absorb higher provisions before breaching a 12% tier 1 capital ratio threshold. Banks in Vietnam and Bangladesh fare most poorly.

Figure 1: Percentage point increase in NPLs ratio to cut tier 1 ratio to 12%

Source: Bloomberg, Tellimer Research. Note: Assumes 100% provisioning of existing and new NPLs. Calculations based on 2019 data

Where are dividends most vulnerable?

As Figure 1 highlights, in addition to banks in Vietnam, Bangladesh and Pakistan, where dividend restrictions have already been introduced, those in Sri Lanka also seem to have limited capacity to absorb higher loan defaults and could suspend quarterly dividends even if this is not a regulatory requirement.

Other at-risk sectors include Russia (the central bank has already advised banks not to pay dividends) and the GCC banks, not least given the collapse in oil prices, which poses an additional threat to loan quality in these markets (such as forcing Saudi Arabia to introduce austerity measures and hike VAT). However, ownership considerations may also play a role; for example, Bank Muscat recently paid a healthy dividend for FY 19; its core shareholder is the Royal Diwan, for whom this income is likely welcome during these tough times.

Are there any places to hide?

The charts above highlight that banks in certain SSA markets, notably Uganda, Ghana, Nigeria, Rwanda, have significant capacity to absorb new NPL formation. It is of course possible that they will experience higher new NPL formation than other markets (such as Vietnam, which has so far had a relatively mild coronavirus experience) due to, for example, a less disciplined approach to tackling the Covid-19 threat. But overall, we would argue that the risk of dividend restrictions is more remote in these markets.

A key exception is Ghana, (which incidentally has already relaxed lockdown rules, even as the Covid-19 infection rate accelerates). Here, the central bank has decreed that no dividends should be paid from FY 19 and FY20 earnings – while the names in our coverage are well-capitalised, this is not a universal trait – the regulator may prefer to keep this excess capital in the sector (eg to help rescue weaker names) than see it exit as dividends.

High yielding banks with more defendable dividends

We highlight ten names in our coverage which have high dividend yields, manageable payout ratios and strong capital ratios, drawing on work in our report FM and EM banks: Opportunities in adversity. As such, they may be of interest to yield-seeking investors, particularly those looking to reduce the volatility of their portfolios. Sign up today to access the full report. 

Acknowledgments

We thank the following for their assistance with this report:

Nkemdilim Nwadialor (Tellimer), Faith Mwangi (Tellimer), Kavinda Perera (Asia Securities), Dalia Bona (Pharos Holding), Evgeniy Kipnis (Alfa)



 
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Equity Analysis / Global

The EM and FM banks best able to cope with weaker loan quality

  • With 2020 global GDP declining 3.0% (IMF), a material hit to bank loan quality seems inevitable
  • Banks are more resilient to NPL formation in Sub-Saharan Africa; in Vietnam and Bangladesh they are more exposed
  • Banking shares in Argentina and Nigeria already price in higher NPLs, those in Saudi Arabia and Ghana don’t
Rahul Shah @
Tellimer Research
16 April 2020

2020 global GDP is likely to decline by 3.0%, according to IMF, and the UN estimates 81% of the world’s workers are facing workplace restrictions. In this environment, banks’ loan books face a material deterioration. With the on-the-ground situation evolving rapidly, we employ sensitivity analyses and stress-testing to identify the best-positioned banks.

Asset quality deterioration is likely to be broad-based. In the initial stages of the coronavirus outbreak we thought certain sectors (such as oil or tourism) would generate the bulk of new impairments. But the likely depth of this downturn suggests a much broader impact is likely. Weaker borrowers (highly indebted, or with weak cashflows, such as SMEs/ mass market consumers) will be hit harder, a theme to which we will return.

Regulatory forbearance will muddy the waters. Bank regulators have announced a raft of initiatives, such as interest-free periods, term extensions and subsidies for borrowers; and looser liquidity and capital requirements for banks. These measures should reduce the risk of a snowballing of interconnected NPLs, but may also prevent investors seeing a true asset quality picture, particularly in non-IFRS9 markets.

Our key findings

  • Historically, banking crises saw a median peak NPL ratio of 26%, and a tripling of pre-crisis NPLs
  • A 5ppt increase in NPL ratios reduces tier 1 ratios by 260 bps for our coverage, if fully provided for.
  • Banks in Nigeria have sizeable capital cushions to absorb higher loan impairments.
  • Banking shares in Argentina and Nigeria are already pricing in high NPL formation, but those in Saudi Arabia and Ghana don’t
  • Defensive banks that can cope with weaker loan quality include: GUARANTY NL, SAMBA AB, MCBG MP, MBB VN.
Figure 1: Hit to bank shareholder's equity for a 5% increase in NPL ratio

Source: Bloomberg, Tellimer Research

The full 22-page report is available to our Insights Pro subscribers.


 
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