Fixed Income Analysis /

Nigeria banks: Diamonds aren't forever

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    20 May 2019
    Published by

    Goodbye DIAMBK 2019s: The Diamond Bank 8.75% 2019 eurobond will mature on May 21. Access Bank management has said this bond will be redeemed. This will mark Diamond Bank’s exit from the eurobond market. The bank’s equity ceased to trade earlier in the year, following completion of the merger with Access Bank.

    Only four bonds yield more: There are four Nigerian bank bonds with indicative yields higher than the DIAMBK bonds – the Access Bank (ACCESS) 9.25% 2021, Ecobank Nigeria (ECOTRA) 8.75% 2021, FBN (FBNNL) 8% 2021 and Fidelity Bank (FIDBAN) 10.5% 2022 bonds. Only one of these bonds – the FIDBAN 2022 – is not subordinated. Following Fidelity Bank’s Q1 results, we reiterated our Buy on the bank’s sole eurobond. We believe the bank’s good results support current valuations.

    Upgrading FBNNL 8% bond: We are upgrading our recommendation on the FBNNL 8% subordinated bond to Buy from Hold. The bond is callable in July this year. Looking at the YTC, this bond appears to have performed less well than the Access Bank subordinated security. FBN has fully provisioned for its exposure to Atlantic Energy, its largest non-performing loan. This US$400mn exposure has weighed on sentiment for some time and had become a symbol of FBN’s legacy asset quality challenges. We think that decisive action paves the way for FBN to write off some or all of the loan – something which management has said may be considered if sufficient progress is not made in ongoing litigation and recovery efforts by end-2019. We believe addressing this exposure may mean that FBN is finally able to return to the eurobond market this year.

    Reiterate Buy on ACCESS and ECOTRA subs: Access Bank has said that its US$400mn subordinated bond will be called on 24 June. According to the documentation, the issuer may give 30 to 60 days’ notice for the call. As such, the call notice is likely to be published by the end of this week, in our view. We think this could support valuations of other Nigerian bank bonds. The US$250mn ECOTRA subordinated bond yields c8.4% to the August 2019 call. We acknowledge that performance in Ecobank Transnational’s Nigeria business was relatively weak in Q1. However, we continue to see support from ETI as positive and reiterate our Buy on the ECOTRA bond. As previously flagged, in the absence of new issues, if all Nigerian banks exercise the call options on their subordinated bonds this year, there will only be senior bonds left.

    YTM close to the lows on most bank bonds: As chart 2 shows, sovereign bonds are generally further off the lows than Nigerian bank bonds. While technicals in that part of the market are different, we note that our sovereign research colleagues have Buy recommendations on all NGERIA US$-denominated bonds.

    Risks to our view remain the same: We have maintained a constructive view on Nigerian bank bonds for some time. Lower oil prices and/or disruption to production remain the key risks to this view. A significant increase in bank bond supply is also a risk, though we think that looks unlikely in the very near term.