25/5/2016/InvestmentOne Research

We maintain our negative near term outlook on the sector on the back of limited loan  growth and asset quality concerns in the immediate, given the continued slowdown in economic activity. This, and FX restrictions may likely negatively impact earnings while rising inflation may pressure bottom line performance and ROE.

Our outlook stems from the sector’s recent Q1 2016 result which was reflective of an uninspiring loan book performance. This, and the general deterioration in the macro- economic environment, which saw GDP contract by –0.36% in Q1 2016 (+2.11% in Q4 2015), may have contributed to the rise in NPL ratios, though most banks, with the exception of FBNH, remained below the regulatory requirement of 5%.

Although there was significant improvement in non-interest income, +73.1% q/q in Q1 2016, we highlight that this was partly attributable to a lower base in the previous quarter as it accounted for 16.2% of gross earnings in Q4 2015 (24.4% in Q3 2016).

In addition, the spike in Q1 2016 may not be sustainable given the q/q performances in the last four quarters (-35.1% in Q4 2015, -3.3% in Q3 2015, -3.8% in Q2 2015, +1.6% in Q1 2015). It was also down -26.0% y/y across all banking names in our universe as difficulties in sourcing FX contributed to a slowdown in trade finance activities.

Going forward, we may see a minuscule expansion in loan book growth in H2 2016, on the back of the passage of the budget and an improvement in business sentiment. This may support net interest income, in addition to the higher interest rate floor regime. Further to this,  if a level of flexibility is added to the current FX policy, we may see enhancements in foreign currency related income and gains, which may aid non-interest income in H2 2016.

On the flip side, although a currency devaluation may lead to  loan book growth, due to foreign currency exposure (c.40% of loan book), it may also result in an expansion in existing foreign currency non-performing loans.  As  a consequence we may see an increase in loan loss provisions as banks aim to maintain adequate NPL coverage which may add pressure to current capital adequacy levels. As such, some banks may have to look to raise fresh funds to maintain their capital buffers.

As such, we have modelled average PBT and EPS growth of c.+27.2% and +27.8% respectively, which have been heavily swayed by a huge lower base effect improvement in FBNH. Our average ROE forecast is around 15.9% with GTB having the highest at 22.0%.

Our recently revised ratings are below.

 Click here to download full report “Nigerian Banks Post Q1 2016 Update”