2019 Banking Outlook - Slightly Positive But Risks Remain Lopsided To The Downside


Tuesday, February 05, 2019 05:49 PM / Investment-One Research


Still riding on the theme of our H2 2018 Banking Sector Outlook “Still in focus – Cost of Risk”, we remain slightly positive on our outlook for the banking sector in 2019, largely on the back of our stance on elevated interest rates into at least H1 2019. Our view is also postulated on the likelihood that banks’ stance may shift from shying away from private sector lending (down 2% as at 9M 2018) to a more retail lending position, notwithstanding a preference towards less risky, high yielding NGN assets. As such, non-interest income and slightly better margins may improve bottom line due to increased volumes in treasury securities at higher yields.

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Worthy of note however, given the potential for policy inertia due to the outcome of the elections in February and increased uncertainty, both globally and domestically; as global oil prices remain increasingly subject to declining global growth and demand, and the end of the five-year tenure of the incumbent CBN governor, Godwin Emefiele, we remain cautious on the direction of asset quality in 2019. We opine that the macroeconomic environment would remain challenging and as such we may not see much improvement in asset quality or cost of risk going forward.

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As we can see from the graph above, asset quality remains a major cause for concern as the total industry NPL ratio continues to hover well above the regulatory benchmark of 5%. We also spotlight the opportunities that lie within the digital banking space. As we have seen in recent times, the apex bank in collaboration with lenders have become increasingly innovative in pursing financial inclusion in a bid to drive improve outreach by 20% by 2020 from the current abysmal levels. Resultantly, most lenders have seen their e-business contribute more to non-interest income and thus, non-interest income was up c.10% on average in 9M 2018. The move to drive the digital banking strategy has also seen the growth of the industry operating expenses moderate recently as less human interaction is needed. (i.e more deposits, less branches).

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However, we pinpoint a possible hiccup in the income generated from this strategy. In September 2018, the apex bank proposed granting Payment Service Banking (PSB) licenses to telcos, also in its bid to drive financial inclusion. The goal is for PSBs to reach out to the unbanked 60 million citizens who possess a mobile phone but no bank account. PSBs would be tasked with facilitating high volume and low value customer remittances as well as withdrawal services. This move could potentially dent income previously earned by banks in providing these services. However, we note that while we do not currently possess full details around how the initiative would work, we are of the opinion that these funds would eventually still end up within the banking system. This year could also see increased activities in terms of mergers and acquisitions, as we saw with Diamond Bank Plc and Access Bank Plc, due to the inability of some lenders to raise their capital adequacy requirements above regulatory benchmarks. This was as result of the implementation of IFRS 9 in 2018 and a possible introduction of fresh capital rules called “BASEL III” which could roll out more stringent regulations in defining capital classes and enhance liquidity requirements.

Looking at banking sector performance in the local bourse, despite losing 16.09% in 2018 (vs NSEASI – down 17.81%), it was apparent banking names remained the cherry in the eyes of most investors as it accounted for 44% and 51% of daily volume and value traded in 2018. The decline witnessed in 2018 has now made Nigerian banks the cheapest in Sub Saharan Africa, with a FY19e P/B of 0.5x.

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Finally, our outlook still remains skewed towards Tier 1 banking names given their lower cost of risk, higher liquidity and capital adequacy ratios (CAR), compared to Tier 2 players and their apparent ability to ride out the storm ahead. As such we expect Tier 1 names; particularly GTB & Zenith (consistently outperforming), UBA (Pan-African advantage) to continue to outperform in regards to NIM, PBT and ROE while FBN seems well on track to delivering its 3-year Strategic Planning Programme, capping 2019 as cost of risk recovery story. Lastly we could see some level of recovery in the operating performance of Tier 2 banks especially Fidelity Bank (Growth story).

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