Lenders with diversified earnings seen shielded from uncertainty

Nigerian lenders who get a majority of their profits from a diversified income stream are seen as being better shielded from the current uncertainty in the macro – economic space.

Banks that run a holding company model such as FCMB, FBNH and StanBic IBTC may be in a better position to withstand headwinds from naira depreciation, higher interest rates and potential default on personal loans from a sluggish economy, say analysts.

“We recently held extensive discussions with Stanbic management, which re-enforced our view on the strength in diversity of its platform, going into a period of what we see as significant uncertainty for the Nigerian banks,” said Renaissance Capital SSA bank analyst, Adesoji Solanke, in a January 23 note.

In March 2010, the CBN announced plans to dismantle the universal banking model in Nigeria.

Banks like FBNH and Stanbic were allowed to maintain their non-bank subsidiaries, provided they adopt a holdco model and ring fence capital for subsidiaries operations from the core retail banking capital.

FBNH will not see a spike in Non Performing Loans (NPLs) in 2015, even if GDP growth slows as a result of lower oil prices and uncertainty from naira devaluation, said Oyewale Ariyibi, head of finance, FBN Holdings, in a Dec. 10 interview with BusinessDay.

“We do not forsee worsening NPLs, although there might be a reduction in margins,” “Aribiyi said. “For FX risks we only extend dollar loans to firms with dollar income streams to avoid a mismatch.”

The naira fell nearly 14 percent versus the dollar last year, as oil prices collapsed to under $50 per barrel, stretching the Central bank’s ability to defend the currency.

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RenCap says Stanbic IBTC management sees oil prices of below $40 per barrel as the trigger point for loan restructuring discussions.

Brent for March settlement fell 17 cents, or 0.4 percent, to $48.62 a barrel on the London-based ICE Futures Europe exchange.

During the 2009 banking crisis, the crash in oil prices and subsequent devaluation of the currency led to a significant deterioration in the asset quality of lenders.

Analysts believe this time Nigerian banks have learnt a number of lessons from the last crisis and have improved their risk management structures.

Lenders are still extending loans to firms with strong balance sheet and good corporate governance, even as they retrench from riskier borrowers.

Seplat Petroleum Development Co., Nigeria’s largest listed indigenous Exploration and Production firm, recently received a $700 million seven year secured term facility with a consortium of lenders comprising First Bank of Nigeria Limited, Stanbic IBTC Bank Plc, United Bank for Africa Plc and Zenith Bank Plc, at a margin of LIBOR +8.75% per annum.

Lenders who operate a holdco model of banking have generally outperformed those with only a retail/commercial banking operation this year.

StanBic IBTC is the best performing lender with its stock price down 4 percent year to date, while FCMB, UBA and FBNH have lost 15 percent each.

This compares to the 17 percent fall in Fidelity, 18 percent slide in Guaranty and 20 percent slump in Skye Bank in 2015.

The NSE – ASI has lost 14 percent this year by comparison.

Investors are wary of the sector, as oil and gas (including solid minerals) now make up the lion’s share of Nigerian banks’ credit, with its proportion doubling to 22 percent in FY13, vs. 11 percent in 1Q08.

A rebound in the broader market is unlikely anytime soon, without participation from the banks.

“Given the risk factors in the economic and financial environment, we envisage sustenance of the current bearish trend witnessed so far in 2015 and anticipate a slight reversal, following the general elections,” said Meristem securities analysts in a January 26 note.

PATRICK ATUANYA