Nigerian Banks Sector Update For September 2017: Steadying The Ship


Thursday, September 21, 2017 9:15 AM / FBNQuest Research

Download the FBNQuest Report on the Nigerian Banking Sector – September 2017 HERE 

Earnings growth despite the recession:
The recession of 2016 and the devaluation of the naira have led to a heightened risk environment for the banks sector. Loan growth for our universe averaged -1% between December and June 2017. Contributing to the loan growth decline is a crowding-out effect as government bond yields have stayed elevated. Despite the subdued loan growth picture, banks have been able to deliver strong revenue and earnings growth, capitalising on pricing and fx-related gains. H1 2017 PBT growth averaged 32% y/y thanks to double-digit growth on both revenue lines. We expect the trend in H1 to carry on into H2 such that loan growth by the end of 2017 averages a modest 4%. Having rebounded strongly in 2016 to an average of 18.6%, we forecast the ROAE for our universe to decline to 17.3% due to base effects: fx-related gains, though visible in 2017, are not as significant as they were in 2016. Our 2018E average ROAE forecast is 16.5%.  GT Bank and Stanbic are forecast to deliver ROAEs well above the sector-average, in the 27-35% range over the next two years 

Stable to improving macro environment:  
The macro environment is stable to improving, with the recession behind us. We expect oil prices to be stable, and provide support to the naira (boosting liquidity in the fx market in the process). We forecast GDP to grow 1.6% in 2017E, compared with -1.6% in 2016. Although the banks face reinvestment risk in their fixed income portfolios given the recent movement in yields, we believe they are adept enough to continue to grow their revenue as the last two years have shown

Asset quality issues not spiraling out of control:  
Asset quality risks have been kept under control with the NPL ratio of our universe averaging 5.4% in Q2 2017. While restructurings have helped, the regulator deserves some credit for strengthening banks’ risk management processes after the last crisis. Although we expect some deterioration in asset quality in H2, we do not expect a doomsday scenario. We forecast a year-end average NPL ratio of 6.1%, with all except Diamond Bank (12%) reporting ratios in the mid-single digit range. Tier 2 banks Diamond and FCMB face the highest risk from asset quality deterioration given that their capital ratios are the lowest in the group – 15.4% and 17.3% respectively

Neutral view on the sector; Zenith our only Outperform-rated name:  
We have a broadly neutral view on the sector at current levels. Compared with the 0.82x P/B multiple the sector is trading on currently, our fair values imply that the sector should trade at 0.92x for an average ROAE in 2018E of 16.5%. Zenith, FCMB and Diamond show the greatest upside potential (over 30%), based on our price targets. However, we continue to tread cautiously around tier 2 names. Besides Zenith, our only Outperform-rated name, absolute valuations are not compelling enough to argue strongly for aggressive accumulation of tier 1 names also. Following its better-than-expected Q2 results, we expect a stronger H2 for Zenith. Although its shares are up 49% ytd (vs. 30% ASI), our price target of N29.1 implies upside potential of 32% from current levels. Our preferences among the Neutral-rated names include GT Bank (PT N41.6) and UBA (N10.2) among the tier 1s, and Fidelity (N1.5) and Stanbic (N39.2) among the tier 2, in the near term

Download the FBNQuest Report on the Nigerian Banking Sector – September 2017 HERE

Recommendations and movements in price target

Download the FBNQuest Report on the Nigerian Banking Sector – September 2017 HERE  

For further details, kindly contact Olubunmi Asaolu, CFA via

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