Nigerian Banks: Risks mask hidden value for tier-2 banks

Proshare

Wednesday, November 27 2013 / Cardinal Stone

With the dust settled post Q3 earnings, we adjudge most of our coverage banks particularly in the tier 1 space stable and resilient. The case for most of the tier 2 banks is however different as we saw a much more watered-down earnings on the back of the tougher regulatory environment. Thus, with the tightening regime of the apex bank far from being over, and following adjustments for Q3 performance, we downgrade
FIDELITYBK and STERLNBANK to SELL and maintain a BUY on DIAMONDBNK. We note the expectation of dilution on Sterling Bank’s EPS from the additional right shares

Tides turn for some Tier 2 names...

Following the conclusion of the Q3’13 earnings season, we have made some alterations to our estimates on selected banks within our coverage. Except for
ACCESS which reported a 20% decline in earnings, majority of the tier one banks remained mostly resilient through the tough times, holding run-rates seen since H1'13 fairly steady. However, we saw major variations in some of the Tier-2 names, as Q3 after tax earnings for Fidelity and Skye declined 14% on average, YoY. We observed the following themes which are in line with our expectations i) Slower pace in growth of interest income as a fall out of CBN’s public sector cash reserve regulation effective in the first week of August  ii) An uptick in funding costs in line with our expectations of increased competition for private sector deposits following the increase in public sector CRR. The most distinct break in run-rate was seen from Sterling Bank which booked N3.7 billion in loan loss provision, hence reporting an after-tax loss in the quarter. With the run-rate seen in Q3, our FY estimates for GUARANTY and ACCESS remained unchanged.

Regulatory environment remains stable
At the last MPC meeting the Central Bank of Nigeria maintained status quo on monetary policy tools, but hinted that tightening is still very much on course. Notwithstanding, we expect CBN’s newly introduced supervision framework of Systemically Important Banks to increase confidence in Nigeria's financial system, despite the implied additional burden on these banks. The banks in this category are
FBN Holdings, UBA, Zenith Bank, Access Bank, ETI, GT Bank, Skye Bank, and Diamond Bank, which according to the apex bank, account for more than 70% of total industry's total assets, credit and deposit liabilities, and about 60% of net interbank transactions. The proposed regulation which was announced in September, would see these banks set aside a higher loss absorbency (additional capital surcharge of 1%), which effectively raises the capital adequacy ratio for these banks to 16% amongst other requirements, in a bid to insulate them from distress.

 Valuation
 Following adjustments for Q3 numbers, we raise FY’13 Target Prices for ZENITHBANK,
DIAMONDBNK, and STANBIC (see attached report for revised TPs). Nonetheless, we retain a HOLD rating on ZENITHBANK and a SELL rating on STANBIC. Also, we downgrade GUARANTY to a HOLD, on the back of price appreciation, and retain a BUY rating on DIAMONDBNK



 

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