Nigerian lenders whose earnings have been hit by the Central Bank of Nigeria’s (CBN) tight money policies will see profits rebound once easing begins as early as the second half of 2015, BusinessDay findings show.
“Nigerian banks’ profitability is largely a function of macro stability, and any significant improvement in sector earnings is likely to be driven by a loosening of monetary policy,” said Adesoji Solanke, Renaissance Capital SSA banking analyst, in a September 11 note.
“We further estimate that while all banks’ RoEs would benefit from an easing in the cash reserve ratio (CRR), which we think could happen as early as 2H15, tier 2 banks and United Bank for Africa (UBA) will be the most significant beneficiaries,” Solanke said.
The CBN hiked the CRR on public sector funds for lenders to 75 percent in a bid to stem excess liquidity and protect the naira.
Rencap estimates that Nigeria’s banking sector now has a CRR of about 31 percent, compared to 11 percent in Ghana, 5.25 percent in Kenya and 5 percent in Rwanda, while a comparison of key banking regulations such as capitalisation ratios, net open position limits, cash reserve ratios and liquidity ratios suggests Nigerian banks operate in a tough operational and regulatory environment.
Nigerian banks are struggling to deliver returns in line with their SSA peers – with an 18 percent return on average equity (RoAE) in half-year 2014 compared to 26 percent and 47 percent for Kenyan and Ghanaian banks, respectively.
Many banks adjusted to the CBN policies by aggressively boosting their loan books to compensate for a loss in income.
Lenders grew loans and advances by 24.1 percent at the end of 2013, compared to the 14.3 percent growth in 2012.
“Banks have been pressed on in a quest to raise debt financing from the Eurobond market in order to optimise borrowing cost, hedge currency risk and maximise shareholder wealth,” said Afrinvest analysts in a recent report on the sector.
Investors have sold bank stocks as earnings failed to match a rise in GDP.
The Nigerian Stock Exchange (NSE) Banking Index, which tracks the nation’s 10 biggest banks by market value, has lost -3.54 percent year-to-date (September 10) compared with the -1.07 percent fall in the NSE All-Share Index.
The Nigerian economy grew at 6.37 percent in the first half (HY) of 2014, according to data from the National Bureau of Statistics (NBS).
The cumulative net income for 14 lenders that released HY 2014 results fell -1.6 percent to N246.7 billion, from N250.8 billion in the earlier 2013 period.
Analysts say that the fall in profits is the cost lenders paid for the macro-stability achieved by the CBN.
Nigeria’s July inflation which rose by 8.3 percent has fallen from a high of 13.9 percent in full-year 2009.
There has only been a 9 percent depreciation in the naira/dollar exchange rate over the past five years compared to 17 percent fall for the Kenyan shilling, -45 percent for the rand and -166 percent for the Ghanaian cedi.
Current valuations imply upside potential to most Nigerian banks once CBN monetary easing begins, according to Rencap.
“We favour well-capitalised banks, those with earnings growth and those with innovation, as well as turnaround stories and those closest to regulatory trends,” said Solanke.
“We upgrade UBA to BUY from Hold, cut GTBank to Hold from Buy, raise our Stanbic Target Price and lower our TPs on FBNH, Zenith, Skye and FCMB,” he said.
PATRICK ATUANYA
