Analysts Bullish on Banks with Strong Digital Channels, Domestic Loans
Chapel Hill Denham , an investment banking firm, has expressed interest in Nigerian Banks with strong digital footprint, a well-diversified loans book and sizeable foreign currency position.
In its top picks, the investment firm rated Tier-1 banks and others with strong financial support like Stanbic IBTC Plc.
Analysts however rated Zenith, GTBank among top lenders that will benefits from the current market dynamics follows the impact of rampaging coronavirus in the economy.
MarketForces reported that Banks are expected to post broadly weaker scorecards in 2020 due to the spiral effects of the outbreak, plus tough regulatory demands amidst the pressure.
The firm based its investing decision on long net foreign currency position which analysts believe would support some banks earnings in 2020.
Chapel Hill Denham is bullish on lenders that have strong network of digital channels as well as a well-diversified loan book, largely denominated in local currency.
Robust risk management framework and resilient balance sheet with sufficient capital buffers are among factors that make investment case for the firm.
“By our analysis, GTB with BUY rating at a target price of N37.50 that translates to 87.7% upside and;
“Zenith Bank with BUY rating and target price of N33.55 which gives 134.2% upside are best positioned to gain from the current market dynamics”, analysts stated.
Also, Access bank has a BUY recommendation for price target of N9.77 thus translates to 68.2% upside and;
Stanbic IBTC with price target of N42.69 that translates to 56.9% upside are also well positioned to withstand these macro risks.
“We believe the fundamentals of these banks will support attractive valuations in the event of material deviation from our base case forecasts on sustained weakness in Nigeria’s macro fundamentals”, Chapel Hill Denham said.
The investment firm said banks are expected to post broadly weaker scorecards 2020.
However, analysts held that their base case expectations, which are largely influenced by revised macro fundamentals given current realities, are increased pressure on earnings in 2020.
“We have cut the earnings forecasts of our coverage banks by an average of 3.9% and now expect the EPS to decline by an average of 7.9% year on year in 2020 against 1.9% previously”, Chapel Hill Denham stated.
The investment firm highlighted that Asset quality ratios are also expected to deteriorate on oil sector and USD exposures.
The firm said: “For our coverage average, we forecast the cost of risk and NPL ratio at 1.5% and 7.4% respectively in 2020 as against 0.9% and 5.8% achieved in 2019.
Core loan growth is expected to weaken, but analysts said devaluation would drive inorganic growth.
“While our loan growth forecast for 2020 is 5.2% year on year compare with 17.9% in 2019, we estimate core loan growth at 2.8%.
“Non-interest income is expected to be broadly lower, but FX revaluation gains and digital transaction volume growth are catalysts for some.
“Net interest margins is estimated to contract 50bps year on year given the accommodative stance of the CBN”, the firm stated.
Meanwhile, analysts stated that lenders capital adequacy ratios are threatened on lower earnings and naira devaluation.
On the flip side, Chapel Hill Denham expect that impact of regulatory actions to curb the negative effect of COVID-19 on the sector will be likely mixed.
Analysts Challenge CBN to Address FX Rates Confusion
It stated that the CBN’s initial response to the spread of COVID-19 in Nigeria involved the granting of a one-year moratorium on CBN interventions loans.
The response also include 400bps cut in the interest rate on CBN intervention loans to 5% as well as temporary regulatory forbearance for banks to restructure loans to agriculture, oil & gas and manufacturing sectors.
The CBN also plans credit support to the health, pharmaceutical and manufacturing sectors.
“We expect some of these measures to cushion the impact of COVID-19 on loan growth and asset quality via increased lending to the select sectors and restructuring of loans to vulnerable sectors.
“We also see net interest margin (NIM) pressures for banks with exposure to interventions loans amid broadly lower loan demand due to weaker macro conditions”, analysts held.
On average, Chapel Hill said it has cut the target prices of its coverage banks by 21.6% after the first quarter results.
“We believe some stocks still portend value for investors despite the negative market sentiments largely on weak macro outlook for Nigeria”, analysts said.
Analysts Bullish on Banks with Strong Digital Channels, Domestic Loans
