Thursday, November 20, 2014 6:27 PM / CardinalStone Research
Following the release of 9M'14 results for the period ended 30th September 2014, we present our revised estimates for the banks within our coverage. Our perception is that overall sector performance was generally mixed, with a few banks reporting modest earnings growth. We remain more optimistic on Tier 1 Banks as these counters generally offer better risk/reward tradeoff.
Review and Update
With the earnings run-rate seen for the banks in our coverage as at 9M 2014 and the various regulatory changes in 2014, we do not envisage any significant improvement in FY'14 earnings. Thus, our forward guidance firmly incorporates a majority of the various regulatory antecedents that occurred during the review period. Amongst the issues during the period was the recent (September 30th) implementation of the Basel II capital adequacy requirements.
Thus, in light of the more stringent capital adequacy requirements we saw a number of banks raise additional capital through debt markets, with the interest payment on those liabilities consequently impacting the respective bank's interest expense (notably ETI, ZENITHBANK and FBNH in the tier 1 space). Also, in perhaps a reflection of their stronger capitalization, credit growth amongst tier 1 bank's was surprising aggressive with an average QoQ growth of c.9% in net loans.
Though quite a number of results were in line with our estimates, a number of deviations and changes in our medium term expectation of some banks necessitated a review of our target prices (TPs). In tier 1 space, ACCESS with its impressive 9M'14 financials was the sole upgrade to a "BUY" recommendation on the back of its aggressive loan growth and interest income performance during that period. On the other hand, UBA and ETI suffered TP downgrades following a disappointing performance in UBA and equity dilution in ETI. However, we retain a BUY rating on UBA, GUARANTY and ZENITHBANK given the significant share price declines of the past few weeks.
Amongst tier 2 banks, we revise our TP on STANBIC upwards and upgrade the stock to a BUY following persistent earnings outperformance through Q1'14 to 9M'14 as the group has kept interest expense significantly lower in a period when the opposite was observed for most peers and has maintained a rather resilient non-interest income. On the other-hand, we have cut our TPs on FIDELITYBK and DIAMONDBNK following revisions to our medium term expectations on the back of a slowdown in earning's run-rate since Q2'14.
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