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If you are looking for what bank stock to buy, then this is for you

Nairametrics by Nairametrics
February 12, 2018
in Markets, Spotlight
If you are looking for what bank stock to buy, then this is for you
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Nigerian Banks have enjoyed a bullish ride on the Nigerian Stock Exchange for the past one year. The gains have cut across Tier 1 and 2 banks and have on the average been double digits year to date.

While the market is basked in the euphoria of mega profits naysayers have urged for caution citing the fact that among the positive gains recorded by banks, include the likes of Skye Bank, Diamond Bank and Unity Bank who are experiencing major challenges.

In the case of Skye Bank, it is yet to release its results since 2016 and unconfirmed reports suggest the bank is in a N700b hole. Nevertheless, investors have poured in money into banking stocks hoping to keep reaping the rewards if share prices continue to rise.

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If you are however, a cautious investor and looking for opportunities to take, this Stanbic IBTC report could give you an insight as to what stock to buy, sell or hold. The report focussed on Nigerian Banks.


On their expectation for bank results

We expect our coverage banks to release their full-year 2017 results from late February. We estimate an average EPS growth of 61%, driven by FBNH, Fidelity and Diamond with estimated growth of 220%, 62% and 44% respectively. However, we estimate a 36% decline in EPS for FCMB group. We expect a combination of lower loan loss provisions (relative to 2016), higher yield on assets and derivative gains to drive 2017e earnings.

On Tier 1 banks and their dividend payment expectations

Tier 1 banks to drive dividend pay-outs: We estimate 21% average growth in dividend per share for our coverage banks in 2017e, driven primarily by strong earnings growth. Within our coverage, we expect the tier 1 banks to continue to dominate in absolute dividend paid and dividend pay-out ratio, driven by a combination of their more robust earnings generation capacity and stronger capital positions, putting them under less pressure to retain more earnings. We estimate dividend yields of 7.2%, 6.7% and 5.5% for UBA, Zenith and Access respectively, which is attractive when compared to the MSCI frontier and NGSE 30 index dividend yields of 3% and 2.9% respectively.

On bank profits and how good or bad it might look when results are announced.

Tier 1 banks to drive profitability: We expect the tier 1 banks to dominate from a profitability stand point, despite the materially higher earnings growth expected from the tier 2 banks. The tier 2 banks’ earnings are growing from a materially lower position in 2016. We expect GTB’s ROAE and ROAA to remain the highest within our coverage, at 28.3% and 4.8% respectively in 2017e. We expect ROAE of 20.9% and 18.7% for Zenith and Access respectively, while we estimate weak ROAE positions for FCMB and Diamond at 6.1% and 2.3% respectively.

Bad loans are still a concern for some banks

We expect NPL ratio for our coverage to decline by 140 bps to an average of 7.3% in 2017e from 2016. Even though we expect a 400 bps reduction in FBNH’s NPL ratio to 20%, we expect the company to account for a larger share of NPLs by 2017e. We also estimate higher than regulatory accepted NPL ratios for Diamond, ETI and Fidelity Bank in 2017e, at 10%, 8% and 6% respectively.

Now these are the banking stocks they have picked 

Top picks: We maintain our preference for tier I banks into 2018, with GTB and Zenith the preferred picks. We also see value in UBA and Access Bank; however, we see upside risk to Access Bank’s NPL ratio at this time, as we believe that the bank is behind the curve on asset quality deterioration relative to peers.

The strong Tier 2 banks rally has also diminished potential upside, in our view. Despite our expectations of higher earnings growth for tier 2 banks relative to tier 1 banks, we expect ROEs for the tier 2 banks to remain materially lower than the tier 1 banks over the medium term.

Other likely risks you should be aware of

Key risks: Asset quality risks remain a concern, the resolution of an exposure such as 9 Mobile could result in a further increase in impairments in Q4:17. Impairments in Q4:17 have been higher than in previous quarters following audit and regulatory recommendations. Adjustment of reporting currency from the CBN official rate of N305 to more market realistic rates such as the NIFEX and NAFEX could put pressure on CAR for banks close to the regulatory limit. It could also result in higher NGN valuation of foreign currency NPLs. However, it creates upside earnings risks for names such as GTB, FBNH and Zenith with high net foreign currency positions.

Nairametrics

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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