February 10, 2016/Investment Management & Research
Click here to download InvestmentOne Nigerian Banking Outlook 2016
Sell-off provides attractive upside despite our dim outlook
We update our coverage on the Nigerian banking sector with a near term negative outlook. In our opinion, the sector will see limited growth in loan book as fragile macro environment inhibits lending. In addition, we expect further deterioration in asset quality, especially their oil and gas exposure with the free-fall in crude oil prices. This will negatively impact performances over the medium term, and may have a knock-on effect on ROE.
In our opinion, bank’s interest income may come in uninspiring given the low interest rate environment and the muted growth outlook for the economy. While we see support from the government’s fiscal reforms and the proposed infrastructure spend, we are however concerned about the negative impact CBN’s FX management regime is having on the real sector of the economy. Data from the NBS show that the manufacturing sector has contracted over the last three quarters (-1.75% in Q3 15, -3.82% in Q2 15 and -0.70% in Q1 15) due to difficulties securing FX for raw material inputs thereby impacting on capacity utilisation. As such, we envisage that real sector players will largely be concerned with working capital financing as they put a hold on capex until there is a rebound in aggregate demand.
Although the CBN increased its efforts towards incentivising banks to lend to the real sector, we are skeptical that this may actually happen in the near term due to the perceived high risk environment. Banks, in our view are more likely to continue to invest in the fixed income instruments despite the lower interest rates on offer, thus affecting top line performances.
While there is potential for accretion to earnings from the announced chargeable Negotiable account Maintenance fee, sector performance, in our opinion will largely reflect 1, flat to contracting loan portfolio; 2, the diminishing impact of FX and other non-interest income, which had served to boost results in the early period of 2015, and 3, increase in loan loss provision.
As such, we have modelled average PBT and EPS growth of c. –14.4% and -16.6% in 2016 respectively. Our ROE forecast is around 14.6% on the average for our universe with GTB the only name with above 20% ROE.
We rate ACCESS, GTB, UBA, and ZENITH shares BUY; largely driven by the attractive upside on the sell-off the sector shares have witnessed in the last four quarters. This has seen average sector 2016 P/B of c.0.55x for an average 2016 ROE of c.14.6. On the other hand, we have FBNH as HOLD given the limited upside potential at current levels relative to peers.
