Wednesday, September 14, 2016 8.59am/ FBNQuest Research
Growth taking a back seat, fast
Growth-wise, Nigerian banks are experiencing their slowest year since the last crisis (2009). H1 2016 headline growth rates are flattering (because of the impact of naira devaluation); however, the underlying growth trends are subdued.
Excluding the impact of naira devaluation, risk asset growth is likely to be flattish at best in 2016E. The true trend should be more visible in 2017E - we forecast a 6% average loan growth for seven of the nine banks we cover.
The average ROAE for this group has been trending down since 2012 (21.5%), falling to 14.7% in 2015. On the back of fx-related gains, we expect a marked increase to 20.2% in 2016E but see a return to the previous trend subsequently in 2017E (11.4%), assuming no further fx-related gains.
Weak macro to blame
Unlike in previous years when a tighter regulatory environment was mainly to blame for the weaker growth and earnings trends, more recently, the driver has been macro-driven.
The consequences of Nigeria’s overreliance on petrodollars are visible now, following the crash in crude oil prices. We expect GDP to contract -1.2% in 2016E, compared with growth of 2.8% in 2015 and 6.2% in 2014. In 2017E, we expect a recovery, with growth of 2.5%.
Not all bad news; some encouraging positives to highlight
Despite the macro headwinds, some key positives stand out. First, the banks have been more resilient than the market has been willing to give them credit for. This is particularly true for tier 1 banks.
The NPL ratios of the majority of the banks we cover are still below 5%, and for this majority we do not expect the ratio to rise beyond 7.5% in 2016E. We acknowledge some helping hand from the regulator in some respect, allowing banks to restructure some loans.
However, for the tier 1 banks, this relates to a limited proportion of their loan books. The simple fact is that compared with 2009, the obligors are of better quality and the regulatory environment has been more robust; ultimately, risk management processes are generally better.
Second, banks have been able to capitalise on the devaluation of the naira, booking significant fx-related gains in the process. While these gains are non-recurring, further devaluation since June implies additional fx-related gains are likely to support Q3 2016 earnings, potentially surprising the market positively.
The tier 1 vs tier 2 divide to grow further
Within our coverage, we continue to expect tier 1 banks to outperform their smaller rivals. Although some tier 2 banks are also benefitting from the fx-related gains stemming from naira devaluation in 2016 (FCMB and Diamond), their underlying earnings are much weaker.
In addition, while we expect our coverage universe to show a marked reduction in ROAE after 2017 once the naira devaluation impact is no longer visible, we forecast ROAEs for all our tier 2 banks to remain under 10% in the medium term due to their inherently inefficient operating structures.
In 2017E, we expect GT Bank’s ROAE to remain close to 20%+, followed by Access and Zenith in the mid-teens, and UBA in the 10-15% range. Only these four tier 1 banks have posted gains ytd (25% on average vs the ASI’s -3.7%). Of the four, we find GT Bank fairly valued but see double-digit upside potential for the other three tier 1 banks which we rate Outperform.
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