June 7, 2017/InvestmentOne Research

Please click to download a copy of our the Nigerian Banks Q1 2017 Update

Recent rally amidst improving Macro and FX liquidity caps upside potential

·         We update our near term outlook on the Banking sector from negative to slightly positive on our expectation of a recovery in economic activities, improved FX liquidity and a slowdown in asset quality deterioration. This combined with the continued benefits of the higher interest rate and yield environment may be supportive of ROE over the medium term.

·         Our outlook stems from the sector’s Q1 2017 results which showed strong net interest margin performance, on the back of the higher interest rate floor, and a decline in loan impairment charges.

·         Going forward, we expect to see a steady decrease in non-performing loans (NPL) due to CBN’s intervention sales induced increased FX liquidity, which should be supportive of the trade and manufacturing sectors. Furthermore, the relative stability in the Niger Delta could help to boost activities in the oil sector, particularly for oil & gas service companies.

·         As a result, we may see loan impairment charges, (down -45.9% q/q on average in Q1 2017), decline in FY 2017. This should relieve pressures on capital adequacy, which declined in 2016 due to the twin impact of the spike in loan impairment charges and the FX driven expansion in loan book.

·         Following the successful issuance of Zenith bank and UBA’s $500m Eurobonds, we expect several other names to come to the market to raise fresh capital to maintain adequate buffers. This may see loan book remain muted in the near term while banks continue to reap the benefits of the attractive yields in the Treasury market.

·         While oil prices at c.$50pb are significantly higher than the lows of 2016 (c.$28pb) and oil production has inched up to c.1.9mbpd, from lows of c.1.4mbpd in 2016, we continue to monitor Oil & Gas asset quality given their concentration (c.30%) in Banking sector loan book.

·         Furthermore, we highlight that the on-going liquidity issues in the power sector (c.5% of Banking sector loan book) may negatively impact asset quality in the near term, leading to a spike in loan impairment charges.

·         Nonetheless, while there may be a pickup in lending to the private sector in H2 2017, as the implementation of the budget kicks in and investor confidence improves, we may not see a significant increase in loan book until CBN moves to a more accommodative monetary policy.

·         Our recently revised ratings are below.