Reviews & Outlooks | |
Reviews & Outlooks | |
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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.
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