The Nigerian Banking Index is currently up 16.5% year to date as investors pile into Banking stocks in the hope that could make some profits by selling on to Foreign Investors by the time they return.
Outlook for Nigerian Banks have been somewhat mixed of late with the introduction of the new Flexible Foreign Exchange Rate Policy. According to Rencap, some of the commercial banks are likely to record significant profits from the new policy while non-performing loans provisions may increase for some banks.
Rencap also listed most of the commercial banks and their buy and sell recommendations. Here they are;
GTBank – BUY, TP NGN29.0
We maintain our BUY rating on GTBank but increase our TP by 33% to NGN29.0. In a depreciation environment, we see the bank’s $600mn-plus net long FX position as a significant source of strength, which should help to provide ample asset quality and capital buffers. The impressive growth in its USSD-based mobile banking solution – management views it as a superior technology platform to that of M-Pesa, in a significantly larger economy with lower banking penetration – is also something we think investors should watch. Management sees this as a low-cost significant revenue earner going forward, which should help to offset the losses from the phasing out of commission on turnover (CoT).
Zenith – BUY, TP NGN20.9
We see room for trading income improvements in 2H16, as well as margin improvements, as the yield environment takes an upward bias. The bank’s capital position is relatively strong, and while there could be some downward pressure, we think it generates sufficient internal earnings to be able to keep its ratios healthy.
UBA – BUY, TP NGN9.4
The impressive growth in contribution from Africa is core to our BUY rating, particularly as the group’s numbers benefit in naira terms from translation effects from Africa owing to naira depreciation. See our UBA – Africa rising report for more information.
Access – BUY, TP NGN9.1
We raise our TP by 30% to NGN9.1 and maintain our BUY rating. Management estimated its net FX long position at at least $200mn, which should provide some capital and asset quality buffers. Overall, management reiterated its confidence in delivering at least 22% RoE in FY16 and thinks the weaker exchange rate should be earnings-positive for its outstanding $1bn FX swap positions.
FBNH – HOLD, TP NGN4.6
We acknowledge the challenges with FBNH’s high FX NPLs, weak coverage and capital ratios. We have had extensive discussions with the regulator and other banks to gauge room for systemic support for this institution should things deteriorate, and our sense is that the system will support the bank through this difficult patch. Should events cause it to breach the minimum CAR requirements, we do not expect the CBN to do anything more drastic than place a freeze on credit growth, mandate the sell-down of some assets and prevent the banking business from paying dividends to help generate internal capital. We think cost improvements are in progress; while asset quality and capital challenges could take more time to fix, the bank’s sizeable net long FX position should provide ample buffers. In our recent meeting with the CEO, management reiterated confidence in the bank’s ability to service its eurobond obligations, following our questions around the distressed yields at which these instruments are trading. On the back of the above, particularly the net long FX position, on which we previously had little clarity, we upgrade the stock to HOLD, from Sell, with a revised TP of NGN4.6, flagging that while a capital raise may be off the agenda in 2016, until management delivers on its key targets, this could happen in 2017, should market conditions improve, in our view.
Stanbic – HOLD, TP NGN17.2
The challenges with the Financial Reporting Council (FRC) make it difficult to formulate a constructive view on the earnings outlook for Stanbic. However, the fundamentals appear intact, although we have asset quality concerns. We expect the bank’s trading income to receive a boost over time from the liberalisation of FX markets. Furthermore, while we await a resolution of the issues with the FRC, we expect the technical treatment of the accruals to be such that they are written back, ultimately boosting earnings in previous years, as a restatement could need to happen. Management thinks AuM and PBT growth in the wealth business should be c. 10% in 2016 as a base case.
FCMB – HOLD, TP NGN2.1
We increase our TP on FCMB to NGN2.1, but maintain our HOLD rating. With naira depreciation, we should see some improvements in state government revenue, and this should be positive for FCMB, given that a sizeable portion of its NPLs are a result of delayed payments to government employees. However, we are concerned about the reduction in oil production and what this could mean for state government revenue. Management also mentioned that NPLs trended upwards in 2Q16. We estimate the bank’s net long FX position at $125mn and see this as providing material asset quality and capital buffers in the weaker currency environment.
Fidelity – HOLD, TP NGN1.4
Relative to other tier 2 banks, we think asset quality trends at Fidelity have been the most impressive. The bank made a conservative decision to charge the required NGN1.1bn general provision on its Oando exposure to its P&L in 4Q15, and we could potentially see some write-backs in 2H16, following a pay-down and restructuring of the loan. One of our key concerns for Fidelity is its exposure to Aiteo – should the CBN force a classification of its $172mn portion, the NPL ratio could spike to as high as 13% (using NGN300/$). However, the bank has a net long FX position of $120mn, which should help to ease the pain from such an event.
Diamond – SELL, TP NGN2.5
We still have material concerns on the earnings outlook at Diamond. In a depreciation environment, we expect its capital ratios to come under significant pressure, partly owing to its relatively low FX long positions and high CoR numbers (with guidance for at least 5%). Furthermore, 45-50% of the bank’s FY15 NPLs were in FX and provisions are mostly held in naira, which is clearly negative for coverage ratios. FX liquidity challenges are prevalent with its letter-of-credit positions (a sector-wide risk), partly because the bank has used its internal liquidity to settle obligations on behalf of clients who have not been able to source FX from the CBN. We see significant challenges here and we maintain our cautious view on the stock.
Skye – SELL, TP NGN1.1
The fact that Skye is yet to release its FY15 results is a major concern to us, supporting our SELL rating on the stock.
Get the full report below;