Leading Investment Banking Firm and Fund Managers, Renaissance Capital has issued a buy or sell report in anticipating of a devaluation of the naira by about 20%. The Investment firm in its report titled “Nigerian banks Navigating stormy seas” reviewed 10 commercial banks based on their capital, expected dividend payout, exposure to oil and other risk. Here is a summary of the highlights in the report;
Zenith – BUY (maintained), TP NGN14.9 (previously NGN22.4)
- We maintain our BUY rating on Zenith but have cut our TP (Taregt Price) by 34% to NGN14.9 on lower margins and revenue risks from the anticipated removal of CoT in 2016.
- Further, we reduced our FY16E PBT by 25% to NGN118.6bn and forecast a dip in RoE to 15% in FY16E, from 18% in FY15E.
- Alongside Stanbic, Zenith Bank has the least exposure to these sectors at 13% in 9M15.
- Further, if we assume the bank has to write-off 50% of its loans to upstream,/services and power, and 10% of the remainder of its loan book, leading to a 14% CoR, we still derive an adjusted TP of NGN10.3, a 9% premium to current market prices.
- This indicates that the current price appears to have more than factored in these risks and the stock appears oversold. Key risks to our estimates are highlighted under the risk segment of this note.
GTBank – BUY (maintained), TP NGN19.4 (previously 25.0)
- We maintain our BUY rating on GTBank but have cut our TP by 23% to NGN19.4 on lower margins and revenue risks from the anticipated removal of CoT in 2016.
- Further, we reduced our FY16E PBT by 19% to NGN106.7bn and forecast a decline in RoE to 20% in FY16, from 25% in FY15.
- In our view, GTBank is probably the only bank that we see delivering RoE close to its cost of equity in 2016.
- The bank has the second-largest lending exposure to oil & gas, including downstream, at 33% of total loans in 9M15 (19% upstream, 9% services and 5% downstream) – which concerns us given the rising external risks to this sector.
- We have stress-tested our valuation to assume the bank writes off 50% of its loans to upstream,/services and power, and 10% of the remainder of its loan book. This leads to a 19% CoR, implying an adjusted TP of NGN12.9 and a 3% discount to the current market price. This indicates that the current price appears to have factored in these risks and the stock appears oversold. Key risks to our estimates are highlighted under the risk segment of this note.
Stanbic – BUY (upgraded from Hold), TP NGN20.9 (previously NGN22.5)
- We upgrade Stanbic to BUY from Hold, but have cut our TP by 7% to NGN20.9 on a lower margin and NIR outlook.
- We also reduced our FY16E PBT by 14% to NGN27.2bn and forecast RoE of 15% in FY16E. We believe Stanbic was relatively more up front about acknowledging asset quality stress in 2015 vs peers, leading to its significantly higher CoR at 4% vs the 1.4% average for its peers in 9M15.
- The bank has decent-sized exposures to some of the sectors we consider risky, including general commerce, consumer lending and manufacturing.
- The bank nevertheless has the highest breakeven CoR in the sector at 10% and on our estimates, it would still have sufficient capital (3 ppts buffer) in the event of a 50% naira devaluation.
- Now trading at 1x FY16E book, we believe investors at the group level would be buying the wealth business at a 9% discount to our fair value for this business, with the bank as a free option.
Access – HOLD (previously Buy), TP NGN6.0 (previously NGN8.2)
- We downgrade our rating on Access to HOLD from Buy on concerns we have about how the loan book, which more than doubled over the past three years, could perform under currently deteriorating economic conditions.
- We also cut our TP by 27% to NGN6.0, reduce our FY16E PBT by 17% to NGN70.9bn and forecast a decline in RoE to 15% in FY16E, from 20% in FY15E.
- We have stress-tested our valuation to assume the bank writes off 50% of its loans to upstream,/services and power, and 10% of the remainder of its loan book.
- This leads to a 16% CoR, implying an adjusted TP of NGN3.3 and a 13% discount to the current market price, indicating that the current share price may not have fully factored in these risks.
UBA – HOLD (previously Buy), TP NGN4.1 (previously NGN8.0)
- We downgrade our rating on UBA to HOLD from Buy, cut our TP by 27% to NGN6.0, reduce our FY16E PBT by 35% to NGN53.3bn and forecast a decline in RoE to 13% in FY16, from 20% in FY15.
- Given the legacy nature of UBA’s oil and gas loan book, 60-70% of its exposures therein are to the international oil companies (IOCs), which gives us some reassurance. As at 9M15, 20% of its loan book was in upstream (13%) and services (7%), with only 1% loan book exposure to downstream.
- As at 9M15, management noted that it had restructured about 1% of its loan book, mostly in upstream oil and gas. In light of this, UBA oil and gas loan book appears relatively less risky to us vs peers.
- We are more concerned about its exposure to the power sector, which is proportionately the second-largest in the banking sector, at 9% of its loan book in 9M15. Given all the issues highlighted earlier about developments in the power sector, management is concerned and so are we.
FBNH – SELL (previously Hold), TP NGN3.3 (previously NGN6.6)
- We downgrade our rating on FBNH to SELL from Hold and cut our TP by 50% to NGN3.3 on lower margins and NIR, elevated impairment levels and higher beta assumptions, which raise our cost of equity to 23%.
- Further, we reduce our FY16E PBT by 29% to NGN68.2bn and forecast RoE of 10% in FY16E. Of all the banks in our universe, we think the highest forecast risk lies with FBNH.
- Our analysis indicates that the bank would be one of the first to breach minimum CAR as the naira depreciates in value given its 16% CAR and 43% FX loan book.
- In addition, we still have asset quality concerns arising from its disproportionate exposure to oil and gas vs peers at 47% of total loans in 9M15 (18% upstream, 8% services and 21% downstream).
- On our estimates, the bank does not have sufficient earnings buffers to withstand an asset quality shock that takes its CoR beyond 6.5%.
- The result of assuming the bank writes off 50% of its oil and gas upstream/services, 50% of power and 10% of the remainder of its loan book is that the bank’s CoR could rise to 20%, leading to 49% potential downside to the current share price.
- What weakens the picture is the weak margin outlook for the sector, which reduces the bank’s buffers for additional asset quality stress.
Diamond – SELL (previously Hold), TP NGN2.3 (previously NGN5.1)
- We downgrade our rating on Diamond to SELL from Hold and cut our TP by 54% to NGN2.3 on lower margins and NIR, and elevated impairment levels.
- We reduce our FY16E PBT by 77% to NGN9.9bn and forecast a decline in RoE to 4% in FY16, from 9% in FY15E.
- The key risk for Diamond going into this rough economic patch is its relatively high loan book exposure to SMEs and retail.
- Within its sectorial loan book breakdown, we highlight significant lending exposures to general commerce (20%), power (7%) and oil & gas upstream/services (21%) – three sectors we expect to come under significant pressure given the deteriorating macro environment.
- The result of assuming the bank writes off 50% of its oil & gas upstream/services, 50% of power and 10% of the remainder of its loan book is that the bank’s CoR could rise to 21%, leading to 88% potential downside to the current share price.
FCMB – SELL (previously Hold), TP NGN0.9 (previously NGN2.6)
- We downgrade our rating on FCMB to SELL from Hold following management’s profit warning, lower margins and NIR outlook.
- We also cut our TP by 65% to NGN0.9, reduce our FY16E PBT by 64% to NGN7.8bn and forecast a decline in RoE to 4% in FY16, from 7% in FY15.
- FCMB recently released a profit warning that its audited 9M15 results would come in materially below the previous year, with the weak earnings trend sustained in 4Q15. This was attributed to higher impairment costs taken on its oil and gas loan book, and weak trade finance revenues driven by the ongoing FX scarcity in the country.
- The result of assuming the bank writes off 50% of its oil and gas upstream/services, 50% of power and 10% of the remainder of its loan book is that the bank’s CoR could rise to 18%, on our estimates, leading to 69% potential downside to the current share price.
Skye – SELL (previously Hold), TP NGN1.1 (previously NGN4.2)
- We downgrade our rating on Skye to SELL from Hold, cut our TP by 73% to NGN1.1 and reduce our FY15E and FY16E PBT to losses of NGN5.8bn and NGN1.3bn respectively.
- We have raised our FY15E CoR to 4% in line with management’s guidance and expect this to remain elevated over the next few years, in the absence of an AMCON bailout.
- We also expect the bank’s revenues to come under pressure from weaker trade finance income given ongoing FX liquidity shortages in the country.
- Following our discussions with some providers of trade finance lines, we believe FX challenges are likely to be more pronounced for tier 2 banks such as Skye, FCMB and Fidelity and think investors’ concerns about their ability to service international FX obligations are valid.
- The result of assuming the bank writes off 50% of its oil and gas upstream/services, 50% of power and 10% of the remainder of its loan book is that the bank’s CoR could rise to 22%, implying 78% potential downside to the current share price.
- What does not help is the bank’s relatively weak breakeven CoR at 3.5% based on our FY16 estimates. As for capital adequacy, the bank’s ability to source its planned $150mn from existing investors via a rights issue is uncertain, as this represents 1.2x its current market cap.
Fidelity – SELL (previously Hold), TP NGN0.6 (previously NGN1.7)
- We downgrade our rating on Fidelity to SELL from Hold, cut our TP by 68% to NGN0.6, reduce our FY16E PBT by 42% to NGN10.9bn and forecast a decline in RoE to 5% in FY16, from 7% in FY15E.
- Similar to FCMB and Skye, Fidelity has one of the lowest breakeven CoR levels in the sector at 3.5% based on our FY16 estimates, implying that it has very little earnings buffer to take through asset quality shocks that could crystallise in the near term.
- The bank had the largest exposure to the power sector at 10% of total loans in 9M15, and 27% loan book exposure to oil and gas (upstream 18%, services 5% and downstream 4%).
- The result of assuming the bank writes off 50% of its oil and gas upstream/services, 50% of power and 10% of the remainder of its loan book is that the bank’s CoR could rise to 22%, on our estimates.
- On another note, we highlight that on our estimates, the bank, in addition to Stanbic, is likely to have the highest capital buffer in the event of a 50% naira devaluation.
- Further, the bank was the second-highest beneficiary during the 4Q14-1Q15 devaluation rounds, recording the second most significant jump in FX income in 4Q14, and in 1Q15 vs its 9M14 quarterly trend.