Go underweight Nigerian banks, EFG Hermes tells investors

Nigerian banking stocks plunged yesterday, a day after the all-out price war between Russia and Saudi Arabia sent global oil prices tumbling.

Consequently, banking-giant shares such as Zenith Bank, Guaranty, FBNH, UBA and STANBIC nosedived by 9.69 percent, 9.93 percent, 9.28 percent, 9.60 percent and 10 percent, respectively, on Tuesday.
Given macro-economic disruptions, EFG Hermes, an Egyptian investment bank, is suggesting that investors reduce their weighting of Nigerian banks.

“We would be comfortable recommending holding GTB at current valuations given its long USD position, higher-than-sector average Net Interest Margin (NIMs), strong Capital Adequacy Ratio (CAR), and higher quality asset book,” a report by Simon Kitchen, head of macro-strategy at EFG Hermes Research, Mohamad Al Hajj; vice president – head of MENA strategy, EFG Hermes Research, and Mohamed Abu Basha, director – head of macroeconomic analysis, EFG Hermes, said.

Nigeria is probably the most vulnerable from a macro-economic standpoint as the decline in oil price combined with potentially lower exports (of oil) could potentially tip the country back into recession.

Weaker GDP growth could make it more difficult for Nigerian banks to meet their Loan to Deposit Ratio (LDR) targets resulting in greater cash reserve ratio (CRR) deposit requirements, which would be a negative for net interest margins (NIMs), the firm stated.

Nigeria’s Gross Domestic Product (GDP) expanded by 2.55 percent in fourth (Q4) 2019 from 1.91 percent growth in 2018.

The Central Bank of Nigeria (CBN) in October 2019 raised the Loan to Deposit Ratio of banks to 65 per cent, after the September 30 deadline given to the banks to meet its 60 per cent directive. However, the regulator has extended the deadline of the 65 percent LDR to March 31, 2020.

However, “as we have consistently seen since 2016, the CBN is likely to provide asset quality forbearance and thus the cost of risk could remain under control”, the analysts said.

On the positive side, the firm said devaluation could even be positive for Nigerian banks as most of them are long USD.

In the report, the firm thinks Nigerian names will be more under pressure vs East Africa or Morocco. This is simply due to the fact that there are more negative variables in Nigeria vs other economies.

“We would expect Dangote Cement to be under intense pressure (margin erosion to sustain) if the economic impact was large. In Nigeria, we think Lafarge Africa will ride it out better as its financials are recovering from a low base,” it said.