Equity Analysis /

Nigeria banks Q1 19 earnings wrap: overall good start to the year; Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    10 May 2019
    Published by

    Net attributable income rose 17% yoy on aggregate (ahead of our 4% growth forecast) and ROA improved 0.3ppts yoy to 2.4%, driven by a lower cost of risk and effective tax rate (down 0.5ppts and 12.3ppts yoy, respectively). Underlying performance was weaker, as core operating revenues and pre-provision profit (PPP) only grew by 9% yoy and 3% yoy, respectively, in line with our expectations. Access, Fidelity and UBA outperformed peers on PPP growth, posting the highest revenue growth, but FBNH and FCMB lagged on operating cost pressure (both) and lower FX/trading income (FCMB). Stanbic recorded a 17% yoy decline in net income, due to a sharp but expected drop in net impairment write-backs. Notably, the Access/Diamond merger was concluded during the quarter.

    Overly discounted valuation – Buy Nigeria banks. The sector trades at median FY 19f PB of 0.5x, a 51% discount to our coverage universe. This presents an attractive entry point, but the lackluster macroeconomic backdrop could continue to contribute to weak investor sentiment and keep near-term valuation depressed. Our views on the sector are unchanged, even given the unexpected news that President Buhari is nominating Central Bank Governor Godwin Emefiele for a second term. We maintain our Buy ratings for the most part, with the exception of FCMB, where we have a Hold – and we discontinue our coverage of Wema. Our top picks remain GTB (best-in-class cost efficiency), Zenith (solid capital ratios and dividend yield) and Stanbic (profitable wealth business, solid capital base). 

    Lower asset yields contributed to the weak net interest income (NII) trend for most. The median yoy decline in gross asset yields was c0.7ppts, which outweighed a 0.4ppts reduction in the cost of funds. Due to this, most banks only recorded NII changes in the -2% to +8% yoy range, with the exception of Access and Zenith, which significantly outperformed (27% and 23% yoy growth, respectively) on markedly higher interest income on investment securities (Access) and lower funding costs (Zenith). 

    E-banking income growth supported non-interest revenue (NIR) as FX/trading income fell. As expected, several banks (GTB, FCMB, UBA and Zenith) reported weaker trading income and FX gains, resulting in a 22% yoy decline for our universe. However, for most, this was offset by e-banking income growth, which surged 64% yoy to account for 16% of NIR for our coverage (10% in Q1 18), ahead of our expectations. There were also notable increases in other transaction and account-related fees which contributed to the 12% yoy growth in net fees and commissions and kept NIR flat yoy. In contrast, Zenith recorded a 35% drop in NIR, led by a 64% yoy decline in trading/FX income, below our expectations. 

    AMCON charges drove the 8% yoy rise in operating expenses, jumping 34% yoy to account for 18% of total operating expenses (14% in Q1 18). This was due some banks (notably, GTB) front-loading the full-year charge, as well as increases in the end-FY 18 total assets balance (incl. off balance sheet items), upon which the levy is based. We assume the AMCON burden will persist, as the fund’s recovery continues to face challenges.