By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-Two (2) top tier Nigeria lenders, United Bank for Africa Plc (UBA) and Zenith Bank Plc (ZENITH) on Wednesday got a BUY recommendation, according to a latest report by Investment One Research entitled “Bearing the brunt of fiscal laxity: we are neutral-to-negative in the immediate”.
The report also put a NEUTRAL recommendation on FBN Holdings Plc and Access bank Plc respectively, while it recommended a SELL recommendation for Guaranty Trust Bank Plc (GTBank).
“We initiate coverage on the stocks of five Nigerian systemic important banks with a neutral to negative near term view. Zenith bank, UBA (BUY); FBNH and Access are rated NEUTRAL; and GTB SELL,” the report affirmed.
According to Investment One, while most of the banking shares have seen selloffs since the last quarter of 2014, which has driven attractive upside in some stocks, “our prevailing cautious slant informs our dim outlook despite the appreciable upside we see in the sector year-end 2015. We highlight that GTB, in our opinion, remains a core holding post 2015 despite the potential downside we see in the stock through 2015,” the report added.
It says the banking sector continues to be challenged by the tight regulatory environment, which in turn has reduced investible funds available to grow the interest income line.
Investment one noted that the first quarter (Q1) 2015 banking numbers signaled waning support from foreign exchange (FX) revenue related non-interest income which strongly supported the fourth quarter (Q4) 2014 results.
Again, it said the consensus is that the harmonisation of cash reserve requirements (CRR) will have varying impacts on individual banks, depending on their relative exposure to public sector and private sector deposits. “However, we conclude that the net effect of the new CRR structure will further weaken earnings in the banking industry through higher cost of fund and reduced ability to earn interest income from liability generation,” Investment One added.
Also, the report disclosed that banks have begun to limit their loan exposure to certain sectors that are adversely impacted by declining government expenditure. “While the restriction on credit provision to such sectors may affect economic growth, we expect that it will ensure safety of depositors’ funds and reduced our forecast weakness in NPL ratio given the elevated interest rate regime,” the report further affirmed.
Investment One says going forward, in the face of the tight regulatory environment and macroeconomic headwinds, its near term outlook for the sector is flattish to negative on modest loan growth. “Nonetheless, we prefer GUARANTY and ZENITHBANK, in the medium to longer term given their relatively stronger asset quality and earnings profile,” the report said.
The report concluded that the continued challenging macro situation suggests a slowdown in overall economic output. “As such, we see a slower loan growth environment and a higher incidence of loan book deterioration. Overall our best outlook for the sector is neutral to negative,” it affirmed.
