Access, UBA have highest upside potential on improved macro conditions – Rencap

Nigeria banking sector is on the path to recovery with an improving asset quality outlook after Africa’s largest economy emerged from recession, according to a report by investment banking firm, Renaissance Capital (RenCap).
“We think the banking sector Non-Performing Loans (NPL) are close to their peak; we also believe capital buffers will rise as profits improve and banks are increasingly more comfortable using an exchange rate of N330/$ (which is an average of the official rate and Investors and Exporters window rate) to value their foreign currency portfolios,” RenCap said in the Feb. 5 report.
“We increase most of the target prices across our sector coverage on our lower risk-free rate assumption of 13% (previously 14%) following the compression in yields. We forecast the highest upside potential in Access (Buy) and UBA (Buy).”
RenCap has a target price of N15.3 per share on UBA, a 20 percent potential upside from its current price and N16 per share for Access Bank a 26 percent potential upside from current levels.
The short-term investment thesis for the banks partly hinges on a lower cost of risk (CoR) in FY18, according to RenCap. First Bank Nigeria Holding (FBNH) and Stanbic IBTC could surprise positively in this regard the report said.
“We believe that the other tier 1 banks ; specifically, Guarantee trust Bank, Zenith bank, UBA and Access bank have limited scope to record improving COR numbers in 2018, considering that even in a challenging macro environment between full year 2014 and 9 month 2017, these banks only reported an average COR between 1.0 and 1.8 per cent,” according to RenCap report.
The report noted higher oil prices will have direct implications on loan performance and RenCap sees potential revaluation gains in Q4 2017, which could offset any negative asset quality surprises.

Despite a positive macro backdrop, RenCap says 2018 will be a recovery story at best as banks earnings growth will be challenged by the declining yield environment, volatility in FOREX related gains, and limited scope for cost efficiencies.
“We believe earnings resilience will also be demonstrated by Net Interest Margin (NIM) protection. We are less concerned about the declining yield environment at Access bank, SIBTC and FCMB, as we expect improvements in the Cost of Funds (COF) will more than offset asset-yield pressure.”
The research and financial advisory firm also assessed the evolution of Non-Interest Revenue (NIR) over the past few years, and believed smaller banks such as Stanbic IBTC, Diamond bank and FCMB should see less volatility in NIR given the relatively higher contribution from stronger more sustainable income streams such as E-banking, business and services.”
The naira traded at N360 per dollar on Monday, according to data obtained from the website of trading platform, FMDQ.
Things appear to finally be looking up for the Nigerian economy after a challenging few years. More important, however, is how this translates to an improving asset quality outlook for the Nigerian banks.
A foreign currency crisis brought on by the oil price rout since mid-2014, saw Nigeria fall out of favour with foreign investors and contributed to the nation’s first economic recession in a quarter of century in 2016.
The situation is however starting to look up once again for Africa’s largest oil producer, though slowly, following a fragile exit from recession in the second quarter of 2017.
Oil prices have inched higher, as OPEC’s production cuts drain the supply glut which dampened prices. Brent crude stood at USD$67.58 per barrel, Monday, according to Bloomberg data, after rising three folds from a record low USD$28 per barrel in January.
The creation of a so-called “Investor and Exporters (I & E) window,” in April 2017, has also boosted dollar supply to the market and paved the way for foreign buying of Nigerian stocks which have since rallied to a three-year high. Some $28 billion worth of transactions have been done on the window, according to FMDQ data.
The naira traded at N360 per dollar on Monday, according to data obtained from the website of trading platform, FMDQ.
“As investors’ confidence increase, more money will be deposited in the banks which will allow investors to meet their loan obligation and also allow them borrow more money. This will impact positively on the profitability and operations of the bank and the economy at large,” said Ayo Akinwumi, head of investment firm FSDH.
Akinwumi added, “Current high oil prices and relative peace in the Niger Delta have encouraged investment in the upstream oil and gas sector, and enabled recoveries or writebacks for banks.”

 

ENDURANCE OKAFOR & DIPO OLADEHINDE