Tuesday, October 10, 2017/ 9:30 PM /CardinalStone Research
On the back of a review of the H1’17 results of banks under our coverage, we have made corresponding adjustment to our projections and valuations. Following our revision, UBA and FIDELITY tops our favourite list, whilst we downgrade STANBIC to a HOLD (previous rating: BUY). We also increased our target price on GUARANTY though we retained our HOLD rating on the counter. Below, we have highlighted key themes we believe will impact Q3’17 earnings.
Banking Sector - Expectations for Q3’17 earnings
Yields on government securities to still support interest income in Q3’17
Amidst strong apathy for credit risk assets, banks under our coverage recorded an average growth of 37.6% in interest income as at H1’17 - buoyed by the high yield environment.
In Q3’17, we expect banks to continue benefiting from attractive yields on fixed income. Thus, we project an average growth of 29.0% YoY in interest income across our coverage banks in 9M’17. In recent times, the CBN phased out the one year OMO bills which moderated yields in the fixed income space (yields on 364-days bills fell by 400bpsin the last one month), but we believe the impact will be negligible on Q3’17 performance given that the easing started in the last month of the third-quarter.
However, if the CBN’s effort is sustained, the impact on interest income may become significant from Q1’18.
NIMs pressure will persist in Q3’17 for banks with expensive deposits
On the flip side, we expect pressure on net interest margin from higher interest expense to persist on the back of the elevated interest rate environment in 9M’17.
We believe ZENITH, FCMB and ACCESS will be the most impacted: ZENITH and FCMB because of their high composition of corporate deposits – 17% and 32% compared to peer average of 6% and 20% respectively – whilst the high cost of debt incurred on commercial papers will continue to pressure ACCESS NIM.
Bank with strong FX liquidity to continue enjoying derivative income in Q3’17
For non-interest income, we expect UBA, ZENITHBANK and ACCESS to continue to report strong numbers from derivative transactions given their strong dollar liquidity following their Eurobonds Issuance in the last few months.
Also, with the overall improvement in FX supply both in the interbank and Investors & Exporters (I&E) window, we expect a spike in income from trade related transactions to consequently boost non-interest income in 9M’17.
Impairment charges to remain elevated in 9M’17
Our view is that impairments across our coverage banks will remain elevated in 9M’17, rising further by an average of c.14% as banks continue to battle the lag impact of the economic recession.
Consequently, we believe cost of risk across coverage banks will remain relatively high compared to pre-recession levels. On the syndicated 9mobile loan, we expect exposed banks to take more general provisions as a necessary prudence measure.
Top picks – We see decent upside in UBA and FIDELITY
Following the analysis of the H1’17 results of our coverage banks and the corresponding adjustment to our projections and forecast, our top picks are UBA and Fidelity.
Our revised target price on UBA (N12.96) and FIDELITY (N2.29) present upside potentials of 38.8% and 65.9% to current market price of N9.34 and N1.38 respectively. Our investment case for UBA is premised on its higher earnings diversification as well as better non-interest income given its improved FX liquidity position, following the issuance of $500 million Eurobond.
On Fidelity, we are encouraged by management’s effort to improve the quality of reported numbers as it became one of the first tier-II banks to commence routine half-year audit. In addition, our expectations of strong earnings growth (+64.9%) in FY’17 coupled with its consistent dividend pay-out culture (FY’17 dividend yield estimate of 16.5%) makes FIDELITY desirable at current price.
For investors with medium term investment horizon, we think FBNH remains attractive at current price levels. We believe in the strong revenue generating capacity of the counter, and we expect profitability to start trending upwards as soon as management house cleaning activities are concluded. Our target price of N7.34 presents a decent upside of 20.7% to current price of N6.08.
Zenith Bank Plc - Rising cost of funds may pressure NIM in Q3’17
Valuation - Cautiously optimistic on ZENITHBANK in Q3’17
Following revisions to our earnings projections, we have raised our target price to N30.62 (previous: N26.64) on ZENITHBANK and maintain our BUY rating on the counter. We are however cautiously optimistic of its performance in Q3’17 as ZENITHBANK H1’17 results reveals an increased pressure on net interest margin (NIMs) due to rising cost of funds (+200bpsQoQ). With interest expense surging by 59.6% in Q2’17, the impact on full year 2017 performance may be significant if management is not able to bring down funding cost in Q3’17.
Also, the possibility of further provisions on its exposure to 9mobile (bank’s exposure: c.N80 billion) buttresses our cautious optimism on the counter. Zenith Bank currently trades at a P/B of 1.14x which is a premium to peer average of 0.80x.
9M’17 earnings expectation
We forecast a growth of 18.1% YoY and 13.5% QoQ in PAT to N118.2 billion ($387.5 million) and N42.9 billion ($140.7 million) in 9M’17 and Q3’17 respectively. This implies a return on equity (ROE) and a return on asset (ROA) of 21.9% and 3.3% respectively.
Backed by the strong yield environment, we project a growth of 42.9% YoY and 1.2% QoQ in interest income to N408.2 billion and N145.9 billion in 9M’17 and Q3’17 respectively. However, we expect higher interest expense (+87.6%YoY) to moderate the impact on net interest income (+20.3% YoY).
We see non-interest income contracting by 65.9% YoY in 9M’17 largely due to the strong FX revaluation gains recorded in the previous year.
In line with industry trends, we expect loans and customer deposits to decline by 3.0% and 0.5% in 9M’17. We expect NPLs to remain stable around 4.5% with a coverage ratio north of 100%.
FBN Holdings - Plc Profitability to trend up in 9M’17
Valuation – We still see upside opportunity in FBNH
Following the revision of our target price to N7.34 in Q2’17, FBNH has returned c.52.5% to investors. Despite the return, we believe there is still significant upside potential for the counter as we expect the bank’s profitability to start trending upwards in Q3’17 as asset quality and operational efficiency continues to improve.
Our target price of N7.34 presents a decent upside of 20.7% from current price of N6.08. Hence, we maintain our BUY recommendation on FBNH. At current price, FBNH is also relatively undervalued to Peers as its P/B of 0.36x remains at a discount to peer average of 0.8x.
9M’17 earnings expectation
Despite the marked revaluation gains (N68.4 billion) recorded in prior year, we expect gross earnings to grow by 4.5% YoY and 7.9% QoQ to N435.9 billion and N153.1 billion in 9M’17 and Q3’17 respectively.
We believe the high yield environment will continue to support interest income (9M’17:+26.2% YoY; Q3’17: +0.8% QoQ) in 9M’17. While we expect non-interest income to decline by 35.6% YoY, anticipated write-backs from previously provisioned loans are expected to boost non-interest income on a quarterly basis in Q3’17 (+28.8%QoQ).
As house cleaning exercise continues, we expect impairments to remain elevated in absolute terms (N93.8 billion). However, we see it moderating by 18.2% YoY and 6.5% QoQ when compared with 9M’16 and Q2’17 respectively.
In all, we project a PBT and PAT of N62.8 billion ($205.9 million) and N52.1 billion ($170.8 million), representing a growth of 9.2% YoY and 22.4% YoY respectively. On a quarterly basis, we forecast a growth of 74.4% QoQ and 69.7% QoQ to N27.2 billion and N22.7 billion respectively.
Guaranty Trust Bank Plc - Bank on track to surpass FY’17 earnings guidance
Valuation – We have raised our target price to N42.50
We have raised our target price (TP) on GUARANTY to N42.50 from our previous TP of N36.65. The increase in our valuation is premised on the bank’s sustained profitability and on our expectation that it will significantly outperform its FY’17 guidance and FY’16 performance – despite the high base due to revaluation gains.
However, we have retained our HOLD rating on the counter as our target price only presents an upside of 1.2% to current price of N42.0. GUARANTY currently trades at a P/B of 2.19x which is at a premium to peer average of 0.8x.
9M’17 earnings expectation
We estimate an Earnings per Share (EPS) of N4.33 in 9M’17 representing a mild increase of 6.2% YoY from N4.08 in 9M’16. Earnings in 9M’16 was skewed by one-off revaluation gains recorded in Q3’16 (N93.6 billion).
Due to the abnormally high base of 9M’16 gross earnings, we expect a slight moderation of 1.8% YoY to N323.5 billion in 9M’17 – excluding prior year FX gains, top-line would have risen by 37.3% YoY.
We see a sustained upward trend in interest income (9M’17: +37.0% YoY and Q3’17: +1.9% QoQ) given the persistently high yields on government securities. However, we expect loan growth to remain negative (YTD:-5.0%) given management’s resolve to curtail credit assets.
Whilst we expect impairment charges to contract by 76.8% YoY to N13.3 billion, we see it inching up by 78.2% QoQ to N6.1 billion in Q3’17 as we expect impairment provisions on the 9mobile loan.
Access Bank Plc - After-tax earnings to rebound in Q3’17
Valuation – We see mild capital gains opportunities in ACCESS
Following the revisions to our 2017 earnings projections, we have raised our price target for Access slightly to N12.09. Our current price target present a mild capital appreciation opportunity of c.24.5% from current price of N9.71. Thus, we maintain a BUY rating on the counter.
We are however not very bullish on ACCESS in the interim because of the high level of volatility in interest expenses from the incessant issue of commercial papers and expensive term deposits. We believe the impact on after tax earnings may become significant if the current trend in interest expense persistsin H2’17. ACCESS trades at a P/B of 0.61x which is a discount to peer average of 0.80x.
9M’17 Earnings Expectations
With the 2017 AMCON charges fully taken in Q2’17, we expect operating expenses to decline by 33.3% QoQ to N40.2 billion. On a yearly basis however, we see operating expenses inching up by 26.4% YoY to N145.2 billion in 9M’17, largely driven by higher personnel and marketing cost.
We see impairments charges rising by 45.1% YoY and 4.5% QoQ to N17.8 billion and N7.5 billion in 9M’17 and Q3’17 respectively. Consequently, we see nonperforming loans rising mildly by 20bps to 2.7% in 9M’17.
Buoyed by attractive yields on money market securities, we expect interest income (+35.5% YoY) to remain elevated in 9M’17, whilst income on derivatives instruments will continue to support non-interest income (+32.1% YoY).
All in, we project a growth of 11.7% YoY and 80.8% QoQ in PAT to N63.8 billion ($209.2 million) and N24.3 billion ($79.7 million) in 9M’17 and Q3’17 respectively. This translates to a return on equity (ROE) and return on asset (ROA) of 17.7% and 2.5% respectively.
United Bank for Africa Plc - Earnings diversification continues to accrue benefits
Valuation- Decent upside opportunities in UBA
We believe UBA’s strong earnings diversification across Africa (34% contribution to total revenue) and good asset quality metrics makes it a choice stock at current price levels. Its strong African coverage also gives it significant room to grow transaction and trade based revenues which may further enhance profitability in the medium term.
Based on our residual income model, we have a target price of N12.96 on the counter. This presents an upside opportunity of 38.8% from current price of N9.34. Therefore, we maintain our BUY rating on the counter. UBA currently trades at a P/B of 0.68x which is at a discount to tier-1 peer average of 0.8x.
9M’17 Earnings Expectations
Given the relatively high interest rate environment in Nigeria and Ghana, we expect interest income (+27.0% YoY) to trend higher in 9M’17.
As the bank transaction focused strategy continues to gain traction, coupled with the increased treasury opportunities due to improved FX liquidity from its Eurobond, we see non-interest income inching up by 40.4% YoY to N100.0 billion in 9M’17.
We see loan loss expense rising by 85.2% YoY and 16.9% QoQ to N16.9 billion and N7.4 billion in 9M’17 and Q3’17 respectively. We however expect NPLs to remain stable around 4.5%.
Contrary to industry trend, we expect loans to grow by 5.0% whilst customer deposits is expected to remain flat by 9M’17.
Overall, we expect after tax earnings to rise by 28.3% YoY and 23.9% QoQ to N67.1 billion ($220 million) and N24.8 billion ($81.3 million) respectively.
Fidelity Bank Plc - Higher earnings, lower cost to buoy earnings in 9M’17
Valuation- We maintain our BUY rating on FIDELITY
After revising our earnings forecast, we have raised our target price for FIDELITY to N2.29. At current price, our target price presents an upside opportunity of 65.9% to current price of N1.38. Hence, we retain our BUY rating on the counter. We are optimistic of the bank’s performance in the short to medium term given the improved quality of earnings report, better operational efficiency, as well as strong earnings outlook.
The major risk to our valuation is a complete breakdown in the ongoing mediation by the CBN on the 9mobile syndicated loan given the size of the bank’s exposure (C.N19.5 billion). Whilst we think a complete breakdown in negotiation is highly unlikely, we have factored a moderate provision of N3.0 billion on the 9Mobile loan in our 9M’17 forecast pending the complete resolution of the loan.
9M’17 Earnings Expectations
We forecast a top-line and bottom-line growth of 16.6% YoY and 64.9% YoY to N128.7 billion ($422 million) and N14.3 billion ($46.9 million) respectively.
Benefiting from elevated yields on government securities and loans, we expect interest income to inch up by 20.0% YoY and 0.6% QoQ to N109.7 billion and N36.8 billion respectively.
On the back of improving operational efficiency, we expect operating expense to decline by 3.5% YoY to N47.0 billion in 9M’17.
We expect FIDELITY’s profitability metrics to trend up significantly in 9M’17. Thus, we see return on equity (ROE) improving by 110bps YoY to 7.4% in 9M’17.
FCMB Group Plc - Earnings to fall short prior year’s performance
Valuation- Good entry point for strategic long term investors
We expect investors’ averseness for FCMB to persist in the interim as the bank’s performance is expected to significantly fall short that of 9M’16. FCMB prior year performance was bloated by non-recurring FX revaluation gains of c.N35.3 billion.
Despite the expected plunge in earnings, we think the current market price is a good attractive entry point for strategic investors with high risk appetite and a medium to long term horizon. Our conservative target price of N1.74 presents an upside of 64.1% to current price of N1.06. Whilst we acknowledge challenges with liquidity, interest expense as well as asset quality, we believe the stock has been oversold and immensely undervalued fundamentally.
9M’17 Earnings Expectations
We expect gross earnings to decline by 14.7% YoY to N120.0 billion in 9M’17 largely due to the non-recurring FX revaluation gains in prior year.
On a quarterly basis however, we expect gross earnings to rise by 9.0% QoQ to N42.5 billion, supported by mild growth in interest income (+7.0% QoQ) and non-interest income (+15.8% QoQ).
Given the stability in the upstream oil & gas sector (c.30.0% of total loans), we expect impairment charges to decline significantly by 46.4% YoY. On the back of the improvement in asset quality, management expects impairment writebacks of c.N5.0 billion in Q3’17.
All in, we expect after tax earnings to plunge by 54.3% YoY to N5.9 billion ($19.3 million) in 9M’17. Whilst on a quarterly basis, we see a significant jump of 106.8% QoQ to N2.9 billion ($9.5 million) in Q3’17
Diamond Bank Plc - Asset quality to improve as economy recovers
Valuation- Successful asset disposal may provide respite in Q4’17
Following marked deterioration in asset quality and profitability as a result of the downturn in economic fundamentals, the bank plans to divest from its francophone subsidiaries in order to shore up capital in Q4’17. Though management did not expressly state the expected proceeds from the sale, it expressed confidence that the sale will significantly shore up capital.
If management assertions on the expected impact on capital are true then we believe the successful completion of this divestment may give the bank the required capital boost to drive its operations and subsequently return to profitability in 2018. However we are yet to factor this into our valuations given the level of uncertainty around the transactions and the timing of the transaction. Therefore, we have retained our target of N1.34 on the counter, this presents a mild upside of 34.0% to current price of N1.00.
9M’17 Earnings Expectations
We expect after tax earnings to surge by 291.3% YoY to N13.7 billion ($44.9 million) in 9M’17. The marked YoY growth is largely due to its prior year’s low base of N3.5 billion (9M’16 PAT plunged by 78%YoY).
Owing to lower FX exchange income reported in H1’17, we expect non-interest income to moderate by 14.1% YoY to N37.6 billion in 9M’17. On a quarterly basis, we however expect it to remain flat, rising marginally by 1.2% QoQ to N12.7 billion in Q3’17.
Though we anticipate a decline of 24.2% YoY in impairment charges (9M’17: N30.5 billion), we believe current impairment level remains relatively high compared to the size of its loan portfolio (Cost of risk of 3.1%)
STANBIC IBTC Holdings Plc - Wealth business continues to drive revenue growth
Valuation- We maintain our TP on STANBIC
STANBIC’s H1’17 performance which was largely in line with our expectations, hence, we have retained our target price of N40.49 on the counter. At current price of N41.0, this translates to a slight downside of 1.24%, thus we downgrade the counter to a HOLD. We believe in the strong fundamentals of the bank which is driven by its wealth business.
Nevertheless, we believe the counter is currently trading around its fundamentally justified fair value. STANBIC is trading at a P/B of 2.5x which is at a significant premium to peer average of 0.8x.
9M’17 Earnings Expectations
In line with industry trend, we expect interest income to rise by 41.4% YoY to N86.5 billion in 9M’17.
Supported by the sustained income growth from the wealth business, we project a growth of 15.2% YoY and 2.3% QoQ in non-interest income to N60.9 billion and N20.6 billion in 9M’17 and Q3’17 respectively.
We anticipate an increase of 8.7% YoY in loan loss expense to N16.6 billion, translating to a cost of risk of 6.0%. However, we expect impairment charges to moderate significantly by 75.0% QoQ to N2.7 billion following the surge in impairments in Q2’17.
Given the run rate as at half year, we expect operating expenses to climb 18.3% higher in 9M’17. We, however, expect it to remain flat QoQ.
All in, we project a marked growth of 77.4% YoY and 44.6% QoQ in Profit after tax to N35.8 billion ($117.4 million) and N11.6 billion ($38.0 million) in 9M’17 and Q3’17 respectively. This implies a return on asset and return of equity of 3.74% and 29.3% respectively.