Nigeria banks should begin releasing audited H1 19 results over the next couple of weeks. We highlight our expectations for Q2 19, following a better-than-expected Q1 19, and reiterate our long-term Buy ratings on most of our coverage. Our top picks remain GTB, Zenith and Stanbic.
Q2 19: we expect earnings to decline by a median of 4% yoy for our Nigeria banks coverage, mostly weighed by higher cost of risk and effective tax rates. Pre-provision profits should hold up better (up 2% yoy), as we expect most banks to record revenue growth and some a downtrend in cost/income. On the downside, we anticipate pressure from lower asset yields and non-core revenues, and hikes in regulatory costs, depreciation charge and marketing expense. Most banks are likely to keep interim DPS flat yoy, although there is upside for two with robust CAR (Stanbic) and earnings support from international subsidiaries (UBA). Unaudited results have already been published by FCMB (better than expected) and FBNH (weaker than expected).
We maintain our Buy ratings on most of our coverage, with the exception of FCMB, where we have a Hold. Considering the weak operating environment and ongoing regulatory changes, our top picks remain GTB, Zenith and Stanbic, despite expected weak bottom line trend for these banks in Q2 19. Nigeria banks trade at a median FY 19f PB of 0.4x, a 59% discount to our frontier banks universe.
Asset quality and capital ratios should hold steady, as loan growth remains weak. We expect weak qoq gross loan growth, but expect NPLs to be flat qoq as a worst-case scenario, resulting in a further moderation in the NPL ratio (to c5.1%, down 1.3ppt qoq). As loan growth is expected to be weak and most banks had robust NPL provisions coverage in place in Q1 19 (76-155% range), we do not anticipate increased pressure on capital.
Fidelity and UBA should outperform on yoy earnings growth, as they are likely to record comparatively high revenue growth, driven by above-average loan growth (Fidelity) and contributions from international subsidiaries (UBA). We also expect the pair to record the highest yoy cost/income improvement. Barring weak market sentiment, this could serve as a positive near-term catalyst for both stocks, with UBA possibly gaining extra support from a high interim dividend yield (4.2% vs 2.1% for others).
GTB, Zenith and Stanbic are likely to lag, as non-core revenues decline (GTB, Zenith), fees and commissions are weighed by weak capital market activity (Stanbic) and lower loan recoveries result in a higher cost of risk (GTB, Stanbic). They should, however, maintain the lead on profitability, with ROA in the 2-5% range (vs a 1.3% median for other banks) and a strong capital buffer that should support loan growth when opportunities become available and/or attractive.
Key surprise areas relate to non-core revenues, cost of risk, and effective tax rate, and the banks most exposed to these variables are Access, GTB, Stanbic and Zenith. There could also be spikes in depreciation, as banks capitalise long-term operating leases in adopting IFRS 16. Following the release of audited H1 19 results, we would expect banks to provide details on compliance with the CBN’s recent 60% loan-to-deposit benchmark, and the expected impact of this (and other moves to drive bank lending) on long-term profitability.