Nigerian Banks are rallying today after yesterdays face saving and redeeming move by the CBN to adopt a flexible Foreign Exchange (FX) regime.
Gains are being led by Financial stocks with the Bloomberg banking index up 6.5% in today’s trading alone.
The positive for banks from a flexible FX regime are huge, although there are a few negatives (especially for those banks hugely leveraged to oil and gas) .
For one Banks should have some revaluation gains for those net long the dollar.
For example GTBank net long position is at least $600mn and a 50 percent devaluation could see the bank record one off gains of N50-60bn.
Also FX trading income which was big for banks in 2014 should begin to make a comeback.
On the negative side there are capital erosions and a potential increase in NPLs as those carrying large FX loans on their books will see higher total size of loans (in naira terms) as well as have to increase provisions.
So who do you buy now?
A report by Renaissance Capital in January 2016, which mimicked the impact of a 20% devaluation on the sector recommended Zenith Bank, GTBank and Stanbic IBTC as buys.
We tend to agree with the names although we would add Access Bank and UBA on the list of bank stocks to buy today.
According to RenCap FBNH, Skye, Ecobank Nigeria and FCMB would probably be quickest to breach minimum CAR requirements due to a weaker naira.
We tend to agree with some names on this list and would point out FBNH as a major SELL due to its elevated FX assets (loans) on its books.