February 10, 2012 Patrick Atuanya & Afego Pyemo
The Nigerian Banking sector may offer attractive valuations and may have come a long way from the depths of the Banking crises of 2009. However, recent profit warnings from United Bank for Africa (UBA) and Diamond Bank, highlight the sectoral risk still inherent for investors willing to invest in bank names.
This is as they continue to offload bad loans to the Asset Management Corporation of Nigeria (AMCON) and book write- offs on such bad loans, as well as adopt the new International Financial Reporting Standards (IFRS).
According to Stanbic/ IBTC Bank analysts, Muyiwa Oni and Rele Adesina, the change in reporting standards for Nigerian banks to IFRS from Nigerian GAAP by Full Year End (FYE) 2012 could result in higher losses, as banks apply IFRS mark to market principles to fixed income assets on their balance sheets.
“By FY12e, we expect the migration to IFRS to have a negative impact on the balance sheets of some of our coverage banks, as they mark to market their bond portfolios. At this point, we expect the hit to pass through reserves, given that most banks are holding these bonds to maturity. It is difficult to quantify the impact at this point, given that we have limited visibility of the bond portfolios of our coverage banks.”
This may already be happening, as UBA Wednesday, issued a profit warning for the full year 2011 sending the shares falling the maximum 5 per cent on the Nigerian Stock Exchange (NSE). Diamond Bank had also earlier announced a loss for the nine months to September 2011 as it continues to work through provisions both on NPLs (non-performing loans) and the impact of divestment from non-banking subsidiaries.
The bank said it expects to announce a loss for FY 2011, driven principally by one-off write- offs against earnings, including those arising from the transfer of loans to the Asset Management Company of Nigeria (AMCON), UBA Chief Executive Officer (CEO), Phillips Oduoza, said in an interview in Lagos on Wednesday that UBA took a substantial write-down on the Zenon Oil Non Performing loan (NPL) portfolio, to the tune of N15bn, which is a 40 per cent haircut and that UBAs haircut was the highest, relative to other banks on Zenon, and the highest haircut it took on any singular loan sold to AMCON.
He also informed that its balance sheet was now very clean, sporting a 3 percent NPL ratio, and that of its 18 country branches outside Nigeria, 14 were now profitable with Africa contributing 17 per cent to deposits, assets and earnings, and with UBA targeting a 20-25 per cent ratio in 2012.
However for bank analyst, Adesoji Solanke at Renaissance Capital (RenCap), management needs to rebuild its credibility at this stage, and warning of possible further write-offs, he notes,
“The interview confirmed some of our earlier thoughts around 4Q11 earnings weakness. The revelation of these long term contracts is new and vague in nature. We have no idea what these refer to, or the magnitude of provisions associated with these contracts. We would also highlight that the 40 per cent (NGN15bn) haircut on Zenon sale, came in ahead of management’s earlier guidance of 30 per cent.”
On UBAs expected NGN 12 billion Net Income for Q1 2012, the Rencap Analyst informs that.
“Some key lines like Interest Income and Provisioning are missing and it could be misleading to make deductions from what was provided.”
On UBAs management’s expectation for revenue growth to outpace cost growth by a factor of about 3, the Rencap analyst states.
“We are unclear about the drivers of this revenue growth forecast, but think it may already be inclusive of returns from AMCON bonds it received in exchange for NPLs, where interest had been suspended. More clarity is however needed. We expect any investor giving management any benefit of the doubt will be tracking the bank’s actual performance against this set guidance”
Nigerian banks have been selling non performing loans to AMCON and booking write-down’s according to IFRS, which is expected to impact their bottom lines as they struggle to meet the 5 per cent NPL December deadline imposed by the CBN.
Meanwhile, UBA has suspended plans to sell shares to raise additional capital due to weak market conditions.
“The board and management has suspended our equity capital raising at this point in time pending when capital markets improve,” Uduoza told a conference call of investors, a day after the bank issued a profit warning on its 2011 results.
Shares of UBA fell almost five percent for a second straight day as investors dumped the stock following the profit warning.
UBA said on Wednesday it expected to announce a loss for 2011, driven by one-off write-downs against earnings, including loans sold to a state-owned “bad bank” AMCON. It forecast a quick recovery in the first quarter of this year.
Source : Businessday