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NEM Insurance Plc 48th AGM and Associated Governance Issues

An integral component of the long-term strategy of any company is corporate governance, epitomised by transparency and accountability.

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VFD Group divest from Germaine Auto Center, Nonso Okpala CEO, VFD Group

An integral component of the long-term strategy of any company is corporate governance, epitomised by transparency and accountability. By extension, it is also the single most important means of sustaining the vibrancy and relevance of any capital market in the world. Furthermore, it has been observed that regulated markets with that adhere to best corporate governance practices have attracted and retained the confidence of investors, local and foreign alike.

As the CEO of VFD Group Limited, a company implementing a long-term investment strategy in the financial services industry, I basically assess companies on three cardinal points. First, the presence of a visionary and selfless leader as espoused by Jim Collins in his book, “Good to Great”. I also look for companies that have strategically positioned themselves within the context of their operating economy. These are companies that have developed a niche, either by way of technology, regulations, efficiency, etc., and established a moat around their business, as a barrier against competitors. The last cardinal point I consider is the company’s adherence to best practice in corporate governance, regardless of the local governance standards or regulatory requirements.

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In the course of our operations, we have invested in a few listed companies – despite being mainly focused on private investments – and we intend to increase our capital allocation to this class of investments. One of our early investment picks was NEM Insurance Plc. The company had been a diamond in the rough for years with its market price then below N1.  However, our valuation of the company, on a futuristic earning basis, was conservatively about N4 per share. This valuation has subsequently been validated by market trends; as at 21st June 2018, the market price of the stock was N3.04. We invested in the company based on our confidence in the long-term prospects of the company and its high score on our three-assessment parameters (i.e. strong leadership, strategic positioning and best practice in corporate governance) particularly the first two parameters.

NEM Insurance has a visionary leader, Tope Smart. He stands out as an extraordinary leader and is remarkably humble at it. He took on a struggling company in 2007 and bootstrapped it into one of the top five insurance companies in the industry. The company has doubled shareholders’ funds in the last five years and consistently paid dividends over the stated period. He has also built a team of remarkable lieutenants who rank as the best in the industry on a cost basis consideration.

As a result of their strategic positioning within their operating economy, the company not only enjoys the insurance regulatory environment, but has further enhanced its economic moat via efficient performance in a sector that is spectacularly known for inefficiency and poor regulatory compliance.

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Unfortunately, it appears that the company is not nearly as strong on governance practices, relative to its stellar performance on the other two counts as stated above. I will elucidate with the organization of the company’s purported 2018 Annual General Meeting (AGM).

As a background, the Directors of the company collectively own less than 23.73% of the company’s issued shares. 22.98% of the 23.73% of the shares attributed to all Directors are held by four Directors (the “ruling 4”) out of ten Directors (source: NEM 2017 Annual Report & Accounts). On closer examination, the situation gets even more interesting. The same audited financial statements reveal that only 16 shareholders, inclusive of the “ruling 4” Directors, have up to 50m shares each and this group of 16 shareholders collectively controls 52.11% of the company’s issued shares. The implication is that there are 12 shareholders who collectively control 29.13% of the company’s issued shares that are not included in the management of the company. VFD Group is one of the 12 shareholders, with a 2.11% stake. In recent times, we have made efforts to identify the other 11 shareholders and observed a trend of exclusion of these shareholders from the activities of the company. For instance, as a run up to the 2018 AGM of the company, most of these shareholders did not receive notice of the meeting, the proposed special resolutions, proxy forms and audited financial statements as required by CAMA. This is extremely suspicious, particularly if one considers the special resolutions proposed for consideration and approval at the purported AGM.

First, special resolutions are usually passed by 75% of the votes of shareholders present and voting in an AGM. In the case of NEM, none of these resolutions can be passed if the 12 excluded shareholders were present and voted against the resolutions. It will be mathematically impossible because if all shareholders are in attendance, the 12 shareholders would represent 29.13% of the possible votes. This will preclude the possibility of achieving the 75% approval that is required for the resolution. This is further compounded by the fact that 100% attendance of its shareholders in NEM’s AGM is impossible. Thus, the only way to assure the passing of such resolutions (if management is not sure of the position of the 12 shareholders) is to tactically exclude them so as to ensure victory if a poll is conducted.

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I am certain the question running through your head is, why go through all of these, at the risk of regulatory sanctions? Why risk the company’s reputation and particularly jeopardize the otherwise stellar achievements and track record of the Group Managing Director? The answer is simple:  the company is run by a minority group of shareholders, “the ruling 4” Directors, who want to secure their hold on the company, at all costs.

The Directors, at the purported AGM, sought a resolution to issue 1.056bn shares of the company by way of private placement, at a price of N2.50. Looking closely at the proposal reveals why, in the words of former President Olusegun Obasanjo, “it is a do or die” affair for this ruling group of Directors. By maintaining the status quo and buying up shares on the floor of the stock exchange, it is currently impossible for anyone with minority holding to gain majority shareholding, and neither is it possible through fair and equitable rights’ offers. Nevertheless, the proposed special/private placement makes it possible for “the ruling 4” Directors plus the “special interest” beneficiary of the special/private placement to achieve a super majority.

Putting this in clearer context, post the proposed private placement, the collective stake of the “ruling 4” Directors plus the special interest to whom the placement shares are issued will increase to 35.82% from 22.98%. Kindly note that the provisions of the special placement gives “the ruling 4” Directors the right to pick who these shares can be allotted to. They can even allot the said shares to themselves or any one of them in the absence of any sensible checks and balances.

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In truth, if the intention of the “ruling 4” Directors is to increase their interest or influence in the company, I have no fundamental objection to this goal. After all, we believe that the interest of shareholders is best served when management is significantly invested in the subject company.  But the offer should nevertheless be appropriately priced. If I were to negotiate on behalf of fellow shareholders, I would place a price tag of N4 per share as I initially stated in this article and every kobo of that valuation can be justified. However, do not take my valuation as it is, let’s look to the market for the appropriate valuation of the company’s shares. The special placement is priced at N2.50 while the market price is currently N3.34 as at 27/06/18, representing a discount of 25.15%. This is clearly unusual and indicative of management’s destruction of other shareholders’ value and is designed to grant inordinate gain to an unidentified “special interest”.  The question is: who will these shares be allotted to?

As an investor and specifically a shareholder of this company, VFD Group will like to participate in this offer. In fact, we will like to take up the entire offer. Why is such a compelling offer restricted to the exclusion of other shareholders who are willing and able to participate? How do you offer a significant stake of a company via a special/private placement priced at a significant discount to market?

My basic understanding of special/private placement posits the following considerations:

  1. That the public company cannot raise capital via rights offer.
  2. That the public company cannot raise capital via a public offer.
  3. That the company is not doing well and as such, investors are reluctant to be exposed to such company and therefore placing the company under immense capitalisation pressure.
  4. That the company is subject to all three above considerations and it is in dire need of funds.

If any of the above stated is the situation with NEM Insurance Plc, then the offer as proposed will be in the best interest of the company and shareholders alike. Unfortunately, this is not the case. Shareholders are willing to participate in a public or rights offer because the company is doing very well. As mentioned earlier, the Management of the company have done remarkably well based on the operations of the company and this is indicative in the current market price, profitability and industry ranking of the company. The company is also not cash-strapped; in fact, the Board proposed and obtained approval for the payment of 10k/share dividend at the purported AGM and has consistently paid dividend in the prior years. It is also not under pressure by regulators to recapitalise, as it is one of the few insurance companies that has maintained a clean bill of health.  By the way, to date, no one has explained to shareholders what the funds to be raised will be utilised for.

So, what is the justification for the proposed special/private placement? What are the proceeds of the proposed offer for? If we must raise funds, why not do it via rights issue or public offer? A private placement appropriates the value in the company for the benefit of a few and savvy shareholders will have none of this.

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On a general note, I will like to address the role of institutions in the pursuance of best practices in corporate governance. Their roles are integral to its attainment or otherwise. I have reviewed the activities of our corporate regulators e.g. SEC, NSE, CAC, NAICOM and others and I am extremely confident in their capacity and moral commitment to upholding global best practice standards in governance in our market. They have demonstrated this time and time again and we have no doubt that it will sustain through the foreseeable future.  It is important to ensure that this governance standards are not only upheld but are seen to be upheld by all relevant parties, including NEM Insurance Plc and all auxiliary and related parties or officers of the company, such as the directors and the company secretary, as well as the Company’s Registrar, APEL Capital & Trust Limited. These parties all owe a fiduciary responsibility to all shareholders and are expected to always act in the best interests of the shareholders.

Before I conclude this piece, I will like to state a few things about VFD Group as a background to this matter, and with specific reference to our investment in NEM Insurance Plc.

  1. We are a Group of companies with interest/aspiration in all sectors of the financial services industry e.g. Asset Management, Bureau de Change, Banking, Microfinance, Insurance, International Remittance, Real Estate etc.
  2. Our operations are funded by our equity and debt investors as well as retained profit and we have been in existence for nine years. We currently have about 48 shareholders from all walks of life, including leaders of public listed companies.
  3. We are not particularly interested in running these companies or retaining Board positions, but we are firmly interested in the proper governance of our investee companies, a strong trend of profitability and consistent payment of dividends. Once that is in place, we are delighted to support the management of these companies.
  4. We also stand against interference with the operations of the company because we do not consider ourselves experts in our investee companies’ areas of business. We believe once our set objectives are in place, we have no business interfering in their business operation.
  5. This article is not written with malice and as much as possible, I have ensured that it is not personal but focused purely on the facts at hand. I also owe a fiduciary responsibility to our shareholders and it behoves me to speak on their behalf and protect their interest. I also think it is in the interest of the Nigerian investing public to speak out and advocate better corporate governance. Our economy will be better off by this and similar efforts.
  6. We think that our interests are aligned with those of NEM Insurance Plc and that there is absolutely no need for protective schemes with the negative implication on the company.

In conclusion, I call on the Board and Management of NEM Insurance Plc to set aside the purported 48th AGM of the Company and the resolutions passed thereat. This should not be done with the mind-set of a victor or vanquished but should be done in the interest of all shareholders, majority or minority alike. I am certain that if we do the right thing by the company, all shareholders will be better for it in the long run instead of a slow and deliberate process of destruction of value that is inevitable, if we continue down this path. In the meantime, VFD Group will take all necessary lawful steps to protect its investments in NEM while supporting the company to continue its growth trajectory.


Nonso Okpala
Group Managing Director/CEO of VFD Group Limited
Email: [email protected]
Instagram Handle: @nonsomokpala
Twitter Handle: @nonsomokpala

Patricia

NM Partners represent articles published in paid partnerships with corporate organisations. They include press releases, targeted content, and other forms of corporate communications on behalf of our Paid Partners.

2 Comments

2 Comments

  1. Adewale

    June 28, 2018 at 9:50 am

    “a company should have as its objective the conduct of business activities with a view to enhancing the economic success of the corporation, taking into account, as appropriate, the legitimate interests of other stakeholder constituencies” By Jason Dorning.

    Thanks Nonso for this analysis, a common man like me has been able to comprehend that a Company’s promotion of equality and the prevention of unfair discrimination of its Shareholders is in the best Interest of the company. The interest of the company is to use their powers for the commercial benefit of the company and its members.

    “The best interest of the company should be interpreted with the parameters of the company as:
    – a sustainable enterprise
    – responsible corporate citizen”

  2. johnessy

    June 28, 2018 at 1:50 pm

    Well Said Nonso. This Is The Practise That Rapes Nigeria & Her Corporate Entities. Greed & OGA On Top Mentality . They Better Change Their Mind Set. Nem Belongs To All Shareholders Not Selected Few GOD Bless You & Your Family. For Voicing Out. The Fraud The 4 directors wants To Perpetrate .

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2020 revised budget, spending inefficiencies, and a looming debt hole  

For the revised budget, the oil benchmark was reduced from $57 per barrel to $28.

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2020 revised budget, spending inefficiencies, and a looming debt hole  , President Muhammadu Buhari, loans, Oil price, FG, Solar vehicles, P&ID firm, Nigeria's GDP, Debt Servicing: Nigeria pays $1.12 billion to World Bank, others in 10-month , How the latest Fitch report affects you in 2020 , Nigeria’s credit rating faces downgrade by Fitch, Nigeria’s fiscal crisis looms, oil hits $32, S&P downgrades Nigeria to junk rating, as India cuts interest rates

The COVID-19 pandemic has been nothing short of unfavourable to an already vulnerable Nigeria. The nation’s overdependence on oil, fragile infrastructure, low foreign and domestic investments, declining foreign reserves and debt crisis, has further tightened the expected economic consequence of the pandemic. It is also what is responsible for the recent revision of 2020’s budget. Last Friday, President Muhammadu Buhari signed into law a revised budget for the year 2020 of N10.8 trillion. Following the restrictions in international trade due to pandemic-induced lockdowns in many parts of the world, weakened global oil demand, as well as the pronounced decline in oil prices, the budget had to be revised to reflect current realities 

The GDP was projected to grow at 2.93% in 2020, but this has now been revised to -4.41%. For the revised budget, the oil benchmark was reduced from $57 per barrel to $28, and crude production was reduced from 2.18 million to 1.7 million barrels per dayNigeria’s Minister of Finance, Zainab Ahmed revealed that the impact of these developments is c.65% decline in projected net 2020 government revenues from the oil and gas sector. So far, Nigeria has been only able to meet 56% of its target revenue from January to May as the global oil price crash affected government revenue due to the COVID-19 pandemic. A budget deficit of N5.365 trillion is expected to be funded by domestic and foreign borrowing while direct revenue funding will cover N5.158 trillion.  

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 READ MORE: G-20 central banks are considering ‘special’ debt swap deal for African countries

The debt situation 

Data from the Debt Management Office (DMO) reveals that Nigeria’s total debt currently stands at N28.62 trillionThis is following the move by Fitch, in Aprilto downgrade Nigeria’s Long Term Foreign Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with a negative outlook. Mahmoud Harb, a director at Fitch had explained that the debt to revenue ratio for Nigeria is set to deteriorate further to 538% by the end of 2020, from 348% that it was a year earlier before improving slightly next year. While the Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries released in 2020, noted that a country’s debt service to revenue threshold should not exceed 23%, Nigeria’s debt service to revenue ratio for the past five years hawitnessed a relatively steady increase. Analysis using data from CBN’s annual Statistical Bulletin reveals debt service-revenue ratio of 32.63% in 2015, 56.83% in 2017 and 43.62% in 2019. For the first quarter of 2020, we witnessed a 99% debt service to revenue ratio suggesting that almost all the revenue generated from both oil and non-oil sources was used to meet debt service obligations.  

While this is reflective of the decline in oil revenue for the period, it is also one sign of our looming debt crisis. According to information contained in the recently approved revised budget, Nigeria spent N943.12 billion in debt service in the first quarter of the year and N1.2 trillion between January and May 2020. It also plans to spend N2.9 trillion on debt service in 2020 against a revenue of N5.3 trillion. This represents a 55% debt service to revenue ratio. About N1 trillion was spent on debt service in the first 5 months of the year. 

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If we were to strive to attain a palatable benchmark debt service to revenue ratio of even 25%, based on the projected debt service for 2020, the government will have to generate at least 11.6 trillion annually. The highest FG revenue witnessed over the past five years since 2015 was 2019’s N4.8 trillion. Even though some of the debts come with very little interest rates like the $3.4 billion loan under the Rapid Financing Instrument (RFI) ajust a 1% rate of interest, the overall debt servicing burden is one that Nigeria may not be able to get itself out of especially since it cannot completely stop borrowing.  

With oil projected to only increase marginally in the coming years from the $28 dip, the nation needs to look into harnessing non-oil revenues. However, because the non-oil sector requires that productivity is enhanced, it begs the question of whether the right infrastructures exist for us to make such demands of the sector. 

 

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What we have been spending on 

Over the past 5 years spanning 2015 and 2019, the Nigerian government has spent about N34.8 trillion comprising of both recurrent and capital expenditures in the ratio of 73% in recurrent expenditure and only 19in capital expenditure; the difference is attributable to transfers. What this means is that only about 19% of the debt load is what has been invested in further developing the nation through the creation of relevant infrastructure. The rest were spent on recurring expenses like salaries – a testament of the profligacy that thrives. Consequently, the funds being spent on debt servicing can be seen as another way of wasting limited resources while funding very little capital expenditure that could be used to stimulate the productivity of Nigerians.  

While COVID-19 has revealed our overdependence on the oil sector as well as the inefficiencies that have left us in the quagmire of increasing debt and reducing revenue from known sources, the biggest slap comes from knowing that Nigeria as a nation has spent so much and achieved so little that it can bank on when the chips are down.  

 

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Why Insurance firms are selling off their PFAs

It has not been uncommon over the years to have insurance companies with pension subsidiaries.

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Why Insurance firms are selling off their PFAs

The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.

A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.

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 So why are they selling them off? 

Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.

The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.

READ MORE: AIICO seeks NSE’s approval for conducting Rights Issue

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Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”

What the future holds

With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.

 

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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian banking system has been through two major asset quality crisis.

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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursedRising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN. 

Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022the highest of all the previous NPL crisis faced by financial institutions within the nation.  

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Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.  

READ MORE: What banks might do to avoid getting crushed by Oil & Gas Loans

Background  

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Over the past twelve years, the Nigerian banking system has been through two major asset quality crisisThe first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis 

The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.  

Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.  

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 READ MORE: Ratings firm explains why bank non-performing loans could be worse than expected

The current situation 

Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability.  These cases are the base case, lower case, and upper case. 

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Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.  

Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrencethe company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.   

Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quicklythe optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024. 

With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.   

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