Nigerian Banks
Hamda Ambah -CEO at FSDH Merchant Bank

Nigerian Banks Will Not Remain Resilient in Performance – FSDH

FSDH Merchant Bank has stated that it expects aftermath of COVID-19 economic slowdown to weigh on deposits money banks in Nigeria.

The financial service supermarket revealed this in a report.

The firm explained that the ravaging impact of the covid-19 pandemic has been felt across most sectors of the Nigerian economy in 2020.

In the report, the Merchant Bank enlightened that the recently published May purchasing manager index (PMI) data from the Central Bank of Nigeria (CBN) puts Manufacturing & Non-Manufacturing PMI at 42.2 and 25.3 respectively.

Nigerian BanksIt stated in the report that this signify that most sectors are currently in deep contraction.

“It is expected that while economic activities would continue to recover, we see business and consumer confidence remaining subdued through 2020 with a second wave of the covid-19 pandemic becoming an increasing possibility”, FSDH stated.

The Merchant bank stated that it believes the banking sector will not remain as resilient in its performance.

Highlighting its expectations for banking sector, FSDH stated that loan growth will be subdued in 2020.

FSDH Lifts Performance Bar, Grows Earnings on Improve Assets Quality

“We expect the impact of slower economic activity and weak business confidence to weaken demand for loans by businesses as working capital needs decline while investment in capital expenditure softens”, FSDH explained.

Thus, the Merchant bank said it expects impairment charge to climb on accelerating default rate.

Explaining further, FSDH said it anticipates that banks would book increased impairment charges in 2020.

“This is premised on 2 key factors which include increased credit growth in 2019 as banks strove to meet CBN’s minimum LDR requirement.

“Also, vulnerabilities in oil and non-oil economic activities could accelerate default rates among borrowers with FCY loans default rate expected to pick up”, the group stated.

On the asset quality of banks, FSDH stated that it expect this to remain fairly stable

The Merchant bank stated that the group remain fairly comfortable on asset quality for most Nigerian banks.

“We do not expect any significant spike in NPLs as the CBN has given banks regulatory headroom to restructure loans in vulnerable sectors.

“Also, we remain comfortable with capital adequacy ratio levels of most Nigerian banks”, it stated.

But FSDH remarked that it anticipated that interest income would be pressured

In it note, FSDH recalled that at the recently concluded MPC meeting, the CBN confirmed its shift towards a dovish stance on monetary policy.

“Against this backdrop, we expect interest rates would be pressured for the rest of the year.

“This would have a positive impact on cost of funds as deposit rates decline while asset yield would be negatively affected”, FSDH explained.

In addition, FSDH stated that the group expects the rate of decline in asset yield to be faster than the decline Cost of Funds.

It hinged this to considerably weaker yields on government securities and weaker loan demand.

It also added the increased competition for quality borrowers amidst strive to comply with CBN’s minimum LDR requirement.

Overall, this implies that the net interest margin for banks would be lower in 2020 and consequently would impact net interest income.

Meanwhile, FSDH stated that non-interest income would be the bright light.

“Amidst the negatives, we expect non-interest income to be buoyed by higher E-Banking & Mobile Transactions”, FSDH stated.

In addition, the group stated that fixed income instruments have been re-priced higher on lower yields in the fixed income market.

“Thus, we expect banks would book significantly improved trading income for the rest of the year.

“This would further buoy non-interest income”, the firm added.

Top picks remain stable & quality names

Overall, FSDH advised investors who maintain interest in banking stocks to buy banks with strong non-Interest income generation, quality history of trading & FX Income.

Also, FSDH added that the purchase should be driven by quality risk management and history of quality dividend payment.

Considering the above metrics, we retain interest in GTBank, Zenith, United Bank for Africa and Stanbic IBTC.

Nigerian Banks Will Not Remain Resilient in Performance – FSDH

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