Flash Report /
Nigeria

Nigeria Banks: Loans to deposit penalties – a twist in the tale

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    4 October 2019
    Published by

    This is an update to the report: Central Bank of Nigeria credits sector loan growth to LDR directive; raises threshold to 65% published on 2 October.

    The Central Bank of Nigeria (CBN) imposed penalties on 12 banks for failing to meet the 60% loan/deposit ratio (LDR) threshold by the September 30 deadline, according to a Bloomberg report published on 3 October. Surprisingly, the CBN appears to have based the LDR calculation on banks’ total funding (deposits and borrowings), rather than just deposits. For this reason, banks such as Zenith and FCMB, which closed H1 19 with gross LDR above 60%, reportedly had portions of their assets sterilised, with negative implications for earnings in Q4 19 and possibly, in subsequent quarters. This suggests that the revised 65% threshold could also be based on banks’ total funding. We note that Fidelity was the only bank in our coverage that measured above that mark at end-H1 19.

    Our initial assessments show that UBA, FCMB and FBNH could be most vulnerable. As at H1 19, these banks had significant LDR shortfalls (using total funding) and elevated cost/income (which suggests a high earnings sensitivity to margin weakness vs peers) as shown in Table 4. Further, in the event that the CBN’s forced lending results in asset quality issues, UBA and FBNH could face the most pressure, based on their relatively weak provisions coverage over stage 2 and stage 3 loans. That being said, UBA’s relatively strong CAR provides a cushion to its capital base, unlike FBNH and FCMB's bottom-range CAR as at end-FY 18 (fully adjusting for IFRS 9). Although our top equity picks are also at some risk, particularly Zenith, they should show greater resilience relative to other affected lenders we cover. GTB and Zenith’s relatively low cost/income ratio should help cushion some of the impact of any margin weakness, while Stanbic should be supported by its very profitable wealth segment. Our preferred banks also have superior NPLs provisions coverage and CAR compared with peers.

    Impact on earnings? In Table 1 below, we show the sterilised balances reported by Bloomberg for the penalised banks in our universe at September 30, relative to key balance sheet lines. Based on our estimates, the opportunity cost on those funds to banks (using our gross asset yield estimates) should be manageable for FY 19, as it accounts for less than 3% of our current earnings forecasts (Table 2). In the event that these lenders fail to achieve the revised 65% loan/funding level by end-FY 19 and additional funds become restricted, the opportunity cost for FY 20f could exceed 10% of our current earnings forecasts for FBNH and UBA (Table 3). That said, we note that our FY 20f opportunity cost estimates are conservative, as they do not account for likely increases in loan volumes by end-FY 19f and banks' efforts to manage their balance sheet by shrinking liabilities. We expect Nigeria banks to begin to report 9M 19 results in a few weeks, which should provide more clarity on their current positioning and exposure to the regulatory risk.

    Recommendations.  From a credit perspectiveThe key factor driving performance has been positive technicals. Zenith Bank's recent tender offer only helped support valuations. The dearth in eurobond supply may continue for now, as banks still seem to prefer to raise funds away from the eurobond market. This may limit the impact of the news on valuations. From an equities perspective: we currently have Buy recommendations on most of the sector, with the exception of FCMB, where we have a Hold. We will be reviewing our earnings forecasts and equity valuation in light of the increased pressure and risks. 

    Table 1: Sterilised funds


    Sterilised funds
    (NGN bn)
    % of H1 19 net loans% of H1 19 assets% of H1 19 deposits% of H1 19 equity

     FBNH 

    77.4 

    4%

    1%

    2%

    14%

     FCMB 

    14.4 

    2%

    1%

    2%

    8%

     GTB 

    25.0 

    2%

    1%

    1%

    4%

     UBA 

    99.7 

    6%

    2%

    3%

    19%

     Zenith 

    135.6 

    8%

    2%

    4%

    17%

    Source: Bloomberg

    Table 2: Opportunity cost for FY 19f 

    NGN bnSterilised fundsFY 19f gross asset yieldOpportunity cost in FY 19% of FY 18a net income% of FY 19f net income
    FBNH77.47.95%1.53%1%
    FCMB14.49.34%0.32%2%
    GTB25.19.25%0.60%0%
    UBA99.77.85%2.03%2%
    Zenith135.67.58%2.61%1%
    Aggregate352.2
    7.01%1%
    Source: Bloomberg, Company accounts, Tellimer Research

    Table 3: Opportunity cost for FY 20f at 65% threshold  

    Table #1: Table title
    NGN bnSterilised fundsFY 19f gross asset yieldOpportunity cost in FY 19% of FY 18a net income% of FY 20f net income
    FBNH83.87.95%6.711%5%
    FCMB15.69.33%1.510%8%
    GTB27.28.87%2.41%1%
    UBA108.07.53%8.111%9%
    Zenith146.97.46%11.06%6%
    Aggregate 381.5
     29.66%5%
    Source: Bloomberg, Company accounts, Tellimer Research

     Table 4: Key ratios, H1 19 


    Gross loans/deposits*Gross loans/fundsProvisions/Stage 2 + Stage 3 loansCARCost/ incomeROE

    Access 

    68%

    57%

    27%

    20.9%

    65%

    15.1%

    FBNH

    53%

    50%

    16%

    **10.7%

    70%

    11.4%

    FCMB

    81%

    62%

    32%

    **13.8%

    73%

    8.1%

    Fidelity 

    96%

    77%

    22%

    17.0%

    73%

    13.4%

    GTB

    58%

    53%

    34%

    23.5%

    39%

    34.1%

    Stanbic

    65%

    52%

    53%

    27.3%

    53%

    31.6%

    UBA

    48%

    38%

    14%

    29.0%

    60%

    21.1%

    Zenith 

    63%

    49%

    34%

    24.7%

    50%

    22.2%

    Source: Company accounts, Tellimer Research; *Incorporates recent bond redemptions (FBNH, Zenith)/issues (Access); **based on last audited results (FY 18).