Nigerian Banks trading at 51% discount to MSCI emerging market peers
As the bearish trend persists on the floor of the Nigerian Stock Exchange, equity research analysts at Vetiva Capital Management have notified that Nigerian banks are trading at a massive discount against their peers in the Morgan Stanley capital International (MSCI) emerging market.
Vetiva Research in a note observed that on a relative basis, Nigeria’s deposit money banks are trading at a price to book ratio (P/B) of 0.8 times, which represent a 51% discount to MSCI emerging market banks.
The firm however stated that its outlook for improved macros in 2020 re-emphasizes it view that Nigerian Banking counters are very attractive at current levels.
In its recent bank sector review, Vetiva Research stated that for third quarter 2019 (Q3’19), its coverage banks remain poised to improve on their first half 2019 (H1’19) operating performance, given its expectations for mild improvement in the operating environment during the 3-month period.
The banks under the Vetiva analysts’ coverage include the entire Tier I banks in addition to Stanbic IBTC and FCMB that are Tier II banks.
The review reckoned that Treasury yields (T-bills and Bonds) inched up by approximately 200 basis points (bps) in August and September after dipping to a 9-month low in July.
On that note, the equity research firm estimates a 75bps upside to net interest margins for all Tier I capital banks, as well as FCMB and Stanbic that are in Tier II category during the 3-month period from improved asset yield.
Analysts at the firm estimated an industry-wide loan growth of 8% quarter on quarter (q/q) driven by the CBNs 60% loan to deposit ratio (LDR) floor.
It stated that these developments, along with trickles of improved spending q/q, drive analysts’ expectations for improved topline earnings -Interest Income and Non-interest Income).
“As we earlier highlighted in our Banking Sector update, DMBs will give pre-eminence to preserving asset quality over credit expansion, in view of the elevated non-performing loans (NPLs) within the sector.
In the first half, the banking sector NPL declined to 9.3% as against 10.8% in Q1’19.
At the end of 2018, the industry’s NPL was 11.7%; hence, we were not surprised when media reports revealed that five of our coverage banks had been debited in excess of ₦351 billion in additional CRR for non-compliance with the 60% minimum or insufficient exposure to priority sectors -Mortgages, SMEs and Retail.
Consequently, we expect a slightly elevated Q3’19 cost of risk for our coverage banks ex ACCESS.
“We project mild improvements in our coverage return on average equity ,ROAE, from 20.4% to 22.2%, then Cost-to-income ratio is expected to move from 56.5% to 56.0% and NPL ratios from 7.7% to 6.7% in Q3’19”, Vetiva Research stated.
Vetiva Research stated that GTB is on track for another solid year of profitability
“Our expectation for Q3’19 interest income is that the line item will grow marginally to ₦75.0 billion as against ₦74.5 billion in Q2’19, driven by a single-digit q/q loan growth forecast.
The firm also expects a slight increase in non-interest income to ₦37.7 billion compare to ₦37.1 billion in Q2- which it considers as a result of further gains from fees and commissions.
It estimated flattish gross earnings for the bank q/q at ₦112.7 billion compare to ₦111.6 billion in Q2.
“In line with the bank’s continuous drive for efficiency, we expect operating expenses to moderate 1% q/q to ₦34.7 billion, while provisions are forecasted to be lower at ₦1.3 billion as against ₦1.5 billion in Q2.
“Profitability-wise, we expect an 8% rise in PBT, mainly driven by an expected recovery which is estimated at ₦5 billion from the telecoms sector. We expect PAT to come in at ₦54.9 billion”, Vetiva Research added.
For Zenith, it stated that lower provisions, operating expenses would boost Q3 profits
Vetiva stated that although it expects a slight decline in gross earnings in Q3, as it is historically the bank’s weakest quarter, interest income is projected to improve to ₦105.7 billion as against ₦92.1 billion in Q2, driven by stronger income from loans and placements.
Non-Interest Income is expected to moderate to ₦62.1 billion, a consequence of weaker foreign exchange gains in the quarter which is normalization from extraordinary gains in Q2.
Vetiva forecast gross earnings of ₦167.1 billion for the quarter, 1% lower than ₦169.2 billion did in Q2.
Operating expenses are expected to moderate 5% q/q to ₦63.9 billion, while provisions are expected to decline q/q to ₦9.5 billion as against ₦11.6 billion in Q2, driven by stronger recoveries in the quarter.
The bank’s pretax profit has been forecasted to rise by 4% q/q to ₦56.5 billion, bringing 9M PBT to ₦168.2 billion. Thus, PAT is expected to print at ₦47.3 billion in Q3, which is a 22% q/q increase, taking 9-month PAT to ₦136.1 billion.
Cost pressures to subdue UBA Q3 earnings further, Vetiva Research revealed.
According to the research firm, the bank is expected to deliver gross earnings of ₦164.6 billion in Q3, which a 1% increase from ₦162.3 billion in Q2, driven by a 6% q/q increase in interest income to ₦112.6 billion- which is also a consequence of the improved yield environment in Q3.
It projected a 7% decline in non-interest income to ₦51.9 billion, mainly driven by a projected decline in foreign exchange income.
It stated that for the 9 months period, interest income is expected to increase by 18% year on year to ₦317.6 billion, while non-interest income is projected at ₦141.1 billion, representing a 33% y/y increase, giving an operating income of ₦309 billion for the period.
Conversely, operating expenses is forecasted to grow by 5% q/q to ₦69.5 billion, driven by elevated cost of risk, with Q3 Operating profit coming in at ₦41.2 billion (-1% q/q).
In the same line, PBT has been forecasted to decline 4% q/q to ₦38.6 billion, but still comes in 38.6% higher y/y at ₦108.9 billion as against ₦79.1 billion 9M’18, while taxation is projected at ₦22.6 billion (+30% y/y) to give a final PAT figure of ₦86.3 billion, 40% higher y/y, with an EPS projection of ₦2.52.
It projected that cost synergies would improve 9M profit margin for Access Bank.
“We expect ACCESS’ gross earnings to grow 20% q/q to ₦196.7 billion, despite the projected decline in interest income to ₦141.6 billion (Q2’19: ₦162.1 billion).
“This is a result of our expectation of a return to normal non-interest income of ₦55.1 billion compare to ₦2.1 billion in Q2 after the significant FX trading losses incurred in the second quarter.
“We expect operating income to improve by 21% q/q to ₦121.6 billion, while we forecast a 12% q/q decline in operating expenses to ₦61.5 billion. Ongoing cost synergies and lower q/q professional fees drive our expectations for a dip in operating expenses.
“This would result in an Operating profit of ₦60.1 billion for Q3’19 and ₦139.1 billion for the 9M period as against ₦78.6 billion 9M’18”, Vetiva stated.
Provisions are projected to go up q/q to ₦10.3 billion, a result of the bank’s expanded loan book and exposure to the riskier priority sectors.
Thus, PBT has been forecasted to grow by 72% q/q to ₦49.8 billion, bringing PBT for the 9M period to ₦123.9 billion. Similarly, PAT is projected at ₦44.8 billion for Q3, 105% higher q/q and ₦107.7 billon for 9M’19, which gives the bank a basic EPS of ₦3.03 for the period.
Meanwhile, slight dip in non-interest income is expected to keep FBNH Q3 earnings flat.
Vetiva Research expect the bank’s interest income to grow by 2% q/q to ₦111.6 billion, even as interest expense stays flat q/q, causing a 2% q/q increment in net interest income to ₦73.7 billion.
Its non-interest income is projected to come in 3% lower q/q at ₦38.8 billion, driven by a slight dip in fees and commissions.
Thus, gross earnings are expected to inch up q/q to ₦150.4 billion. Driven by the bank’s ongoing cost-cutting efforts, the bank’s operating expenses is expected to decline by 13% q/q to ₦72.2 billion. This gives an operating profit of ₦37.7 billion.
“In all, we forecast a Q3’19 PBT of ₦19.5 billion (-5% q/q) and PAT of ₦16.2 billion (+2% q/q), which gives us a 9M EPS projection of ₦1.32 (9M’18 EPS: ₦1.25”, Vetiva Research noted.
