Seeking Descent Return Means Buying these Banks, Telcos Stocks

Seeking Descent Return Means Buying these Banks, Telcos Stocks

Investors seeking descent returns are expected to move to stock market except there is a turn of events in favour of the fixed income market participants.

That would not come so quick given dovish stance of the Nigeria’s central bank.

For the apex bank, stimulating growth is at its core, and diverging from maintaining low interest rate environment won’t come that quick.Seeking Descent Return Means Buying these Banks, Telcos Stocks

Yields have plunged to all time low amidst rising inflation rate. Speaking of inflation rate, it appears that the CBN has given up on it tentatively to allow for some growth.

Unfortunately, the inflation pattern is cost driven, so it is less beneficiary to growth as would regarded if it were demand drive.

Banks and telecoms were major winners in Q2-20, this will likely be the case down the year given size and capital advantage.


The two segments of the economy have relatively inelastic demands with strong cash flowing around from various angle, and economic agents.

In the local bourse, it is also safe to say fast moving consumers goods are supporting pillar when it comes to stock market movement.

Others are less strong to dictate the direction of the market movement, and there are quite a few stock that have outperformed stock market return in 2020.

In its equity note, analysts at Chapel Hill Denham had preached both banks and telecoms as their bigger bets. Though, other investment bankers could not agree less.

In FSDH top picks, these two segment has consistently feature as best bargain. In its note, Chapel Hill Denham did take cognisance of the current economic trend.

Based on this, the firm explained that the banking and telecoms sectors are the winners in terms of growth and analysts believe the trend will be sustained in the short-to-medium term.

Recalled that the Q2-20 GDP figure published by the National Bureau of Statistics (NBS) show that despite the 6.1% contraction in the economy, the financial institutions and the telecoms sectors recorded +28.4% (+24.0% in Q1-20) and +18.1% (+9.7% in Q1-20) growth respectively in Q2-20.

“Our view on the economy is that; …we expect the gradual reopening of the economy to drive a sharp rebound in activities (on a quarter-on-quarter basis) in Q3-2020E, although we expect growth to remain negative on a year-on-year basis”, Chapel Hill Denham said.

Against this backdrop, Chapel Hill Denham expects the growth contraction to ease to a forecast range of -3.5% to -4.5% in Q3-2020.

Beyond Q2-2020, analysts believe the financial institutions and telecoms sectors will still be in growth when the overall economy fully recovers, given strong potentials.

“We highlight that the financial institutions growth was driven by credit growth, which was on the back of minimum loan-to-deposit ratio (LDR) requirement by the CBN of 60% by end of Q3-19 and 65% by end of Q4-19”, Chapel Hill Denham said.

Notably, banking sector credit rose by 21.5% to N18.9tn as at end of Q2-20 from N15.56 trillion as at end of May 2019, on the back of the CBN’s LDR policy.

Chapel Hill Denham said although naira devaluation partly influenced the growth, but analysts at the firm reckon that devaluation is about 15-20% of the N3.3 trillion increase over the review period.

“The sectors that benefited from the credit growth are the manufacturing, consumer credit, general commerce, information & communication, and Agric sectors of the economy”, Chapel Hill Denham said.

The firm said it is worth noting that loan growth, for the banks that have published Q2-20 results, were compelling: FBNH (+10%), FCMB (27%), ETI (Nigerian business: +3% year on in USD terms).

It said performance in the telecoms sector was driven by the substantial increase of 12.8% in mobile voice subscription to 196mn and the 17.2% growth in internet subscriber growth to 143mn as at Q2-20.

The internet subscriber growth was particularly underpinned by telecommuting during the lockdown period in Q2-20.

It is also interesting that the contribution of the telecoms sector to the overall GDP peaked at 14.3% in Q2-20, since rebasing in 2010.

In the Telecom segment, the two listed companies, MTN Nigeria and Airtel Africa, reported strong Q2-20 numbers, particularly for their data business segments.

While MTN Nigeria’s active data users rose by 40.1% year on year in Q2-20, Airtel Africa’s (Nigeria only) grew by 21.0% over the same period.

Stock market rebound continues in Q3-20, despite the bearish sentiments by most investors.

“While we agree that the overall economy is weak and FX illiquidity is a challenge, we believe there are opportunities for investors to earn decent returns in the banking and telecoms sector”, Chapel Hill stated.

The firm said these two sectors have proved resilient, as depicted by the GDP picture with compelling growth outlook, in our opinion.

Importantly, the two sectors are poised for interim dividend payments in Q3-20.

For instance, we find it interesting that MTN Nigeria paid an interim dividend of N71.24bn (higher by 18.6% and a yield of 3.0%) to its shareholders the same day that the NBS announced that the economy contracted by 6.1%.

In all, analysts see a stronger market recovery on the cards, if the FX illiquidity is addressed by the CBN and crude oil prices trend higher, given Nigerian market’s correlation to crude oil.

If these two conditions materialise before the end of Q4-20, it is likely that we see up to an 18% re-rating of the market to around 29,710.56, the peak in 2020 (on 20 January 2020 when Brent crude was US$64.63pb).

Despite the correlation between the NSE ASI and oil prices, we highlight the NSE ASI has performed better than crude oil with a YTD contraction of -5.8% vs. 30.4% for Brent crude.

So, Chapel Hill Denham advised that these 7 stocks – GTB, Zenith, UBA, Stanbic, MTNN, Airtel started on a positive note in Q3-20.

“We believe investors that missed the Q2-20 rebound in the stocks should take a second look at the opportunities in the stocks”, analysts said.

With the exception of Access and Airtel, the stocks recorded stronger recoveries in Q2-20 against the NSE ASI.

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Seeking Descent Return Means Buying these Banks, Telcos Stocks