We raise our TPs and reiterate our positive view on Nigerian banks as we explore electronic banking income, which is becoming an increasingly important share of their revenue base. With rising adoption of technology, we expect further efficiency gains, and see scope for a reduction in the cost of deposits as financial-inclusion rates rise.
Nigerian banks are increasing their focus on retail opportunities, particularly relating to digital transaction service offerings. Most are concentrating on building a retail deposit base from which a steady stream of transaction volumes can be generated, and heavily leveraging technology to provide customers with cheaper, more scalable alternatives to traditional banking. We expect the digital push to gain momentum from rising levels of digitalisation in Nigeria, supportive regulatory policies and the adoption of the agency banking model.
We think electronic banking income for our covered banks will rise by 22% pa in FY 18f-21f, a moderate slowdown from the 28% of FY 14-18f. E-banking income should be the key driver of non-interest revenue (NIR), with its contribution to NIR rising to 25% in FY 21f from 8% in FY 14 and 15% in FY 18f. We also expect operating efficiency gains from the rising adoption of technology and forecast a 3.3ppt fall in the core efficiency ratio for our banks in FY 18f-21f.
Key winners over the medium term are FBNH, GTB, Stanbic and Zenith.
- FBNH tops the sector on e-banking income (28% of NIR) and we expect it to maintain its lead (due to its scale and extensive distribution network), and record strong operating efficiency improvements and retail deposit growth. On this basis, we forecast 20% pa growth in its e-banking income and 9% pa NIR growth.
- GTB’s strong digital banking franchise and use of technology should allow it to achieve the highest e-banking income growth of 30% pa and maintain its position as the most efficient Nigerian bank. Also, despite a 25% pa decline in trading and FX income, its NIR should remain resilient, declining by a mere 2% pa.
- Stanbic has the potential to offer more diversified products than most peers, leveraging its pensions, asset management, insurance and stock brokerage, and bureau de change operations. On this basis, we forecast 25% pa growth in its e-banking income (10% of NIR) and 9% pa NIR growth.
- Zenith should make more headway in its retail penetration, building on recent strong trends. In FY 18, mobile, internet and USSD transactions rose by 95% yoy on aggregate, and drove a 44% yoy increase in e-banking income (11% of NIR). We forecast a 20% pa increase in its e-banking income, although we expect a 5% decline in NIR as trading and FX gains fall by 22% pa.
Fintech emergence – collaboration to continue. The digital financial services landscape in Nigeria is likely to see banks and fintechs continuing to form/maintain collaborative partnerships. Most banks currently partner with fintechs and telcos to drive their digital strategies, where internal competence or resources are lacking. Payment service banks (PSBs) also pose more opportunities than threats, in our view, especially as they bear the costs associated with entering into the targeted remote locations, and banks indirectly gain access to larger customer pools.
Downside risks relate to competitive headwinds from an increasingly fragmented digital financial services market, infrastructure bottlenecks that could limit the uptake of digital financial services, and regulatory pressures and the possibility of price controls on digital financial services to make financial access more affordable.
Higher forecasts and TPs. We raise our forecasts, largely to reflect a stronger trend in fees and commissions, and weaker trading income, as well as Zenith’s FY 18 results. Consequently, we raise our TPs for all the banks, with the exception of FCMB which we downgrade to Sell (from Hold) due to recent share price gains.