- This morning’s announcement of election results saw the All Progressives Congress (APC) of President Muhammadu Buhari retain the presidency, defeating the challenge from the Peoples Democratic Party (PDP) of Atiku Abubakar.
- This implies a continuation of government based on firm regulation and security. However, while Buhari’s first term sailed into the oil price crash of 2015 and the recession of 2016, economic conditions are different – arguably better – now.
- The APC’s renewed majority in the Senate is significant. The Senate proved frustrating to Buhari’s agenda in his first term, 2015-19. Expect the budget to be passed quickly this year.
Nigeria will almost certainly continue with a managed exchange rate. As we argue in Coronation Research: Year Ahead 2019, A Year of Two Halves, 15 January, the Naira is within 10% of its fair value, so fundamental pressure to revalue it is weak. FX reserves are US$42.4bn, which we calculate is compatible with Naira/US$ stability, at close to NGN363/US$1, for the rest of 2019.
The Central Bank of Nigeria (CBN) currently offers a risk-free-rate 587bps above inflation, which keeps foreign investors in Naira money markets. As we argued in January, if inflation trends down mid-year, there may be scope for rate cuts in Q4, or even Q3.
There was a brief pre-election rally, which partly unwound last week. High economic growth rates were not a feature of the last APC administration. That said, the trend in non-oil GDP growth, evident in recent data, suggests that the economy is doing better than earlier thought. As we argued in January, we believe that under such conditions there is upside risk in bank stocks.
Development and growth implications
The international context. Last Saturday’s elections proceeded, for the most part, without violence, and the Independent National Electoral Commission (INEC) went about its business in a businesslike way (albeit after a one-week delay). These facts are likely to be seen with relief by the international community.
Inevitably, there are allegations of irregularities. However, in the African context of a highly contentious electoral outcome in the Democratic Republic of Congo late last year, and hotly-contested elections in South Africa due later this year, Nigeria looks stable and orderly (though perhaps not quite as hopeful as Ethiopia after the election of a youthful and reforming Prime Minister last year).
At the same time, the political picture in Nigeria is not entirely settled. There are still governorship and state assembly elections to be held on 9 March, and in some of Nigeria’s 36 states we expect these to be hotly-contested.
The domestic context
A feature of President Buhari’s first term was the conflict between the President and the Senate. Despite the APC having a majority in the Senate, it was a Senator with opposition sympathies (he later defected to the PDP) who held the Senate presidency.
Friction between the executive and legislative arms of government was a recurring theme during President Muhammadu Buhari’s first administration, 2015-19. The President depended, more than the previous administration, on executive orders where possible. The most serious example of his conflict with the legislature came with the six-month delay in the passage of the 2018 budget, which represented the longest ratification cycle for any full-year budget since 2000. The President presented the budget bill on 7 November 2017 and the act was not signed into law until 16 May 2018.
The Senate President, 2015-19, has now lost his Senate seat. The APC has a simple majority in the Senate which implies that it will be able to elect a Senate President. However, at this stage, with not all the Senate elections declared, it is unclear exactly how strong the APC position in the Senate, and the House of Representatives, will be. On balance, however, it looks as though the President may have an easier relationship with the legislature than during the period 2015-19.
Economy and unemployment
A feature of President Muhammadu Buhari’s first term as President was weak economic growth, 2015-18. GDP developed well below trend and fell into recession in 2016. One key cause was the oil price collapse in late 2014 and 2015 which put pressure on: government revenues; the Naira exchange rate; the trade account; and Nigeria’s ability to import critical industrial inputs.
Low growth has been associated with rising unemployment, which not only took off in 2015 and 2016, as the economy slowed and went into recession but continued to rise during the weak recovery that followed.
The administration’s policy emphasis during this period was on: security; the fight against corruption; tax compliance; and tight regulation, which included exchange controls. Agriculture (25% of GDP) was supported with subsidized fertilizer and soft loans, and never went into recession, and an Economic Recovery and Growth Plan was enacted. One can argue that, after Naira devaluations in 2016 and 2017, the worst is behind us.
Economic growth – the green shoots
Although 2018 GDP growth, at 1.93% y/y, was slow, there are a number of positive items in the data. Non-oil growth is accelerating and reached 2.70% y/y in Q4 2018, compared with the overall growth rate of 2.38% y/y. Of the six largest sectors in the economy, Agriculture, Trade, Manufacturing, and Telecoms have all recorded at least two consecutive quarters of growth.
External shocks characterised the years 2015-18: oil price shocks (2015), followed by a rise in US rates (2018). In forecasting US$58.00/bbl average oil prices for 2019 we demonstrate how the world has adjusted to new realities.
If external shocks in the coming period 2019-23 are not as great as those during 2015-19, then the nascent economic recovery might give this administration an opportunity to address pressing domestic issues. These include the insurgency in the North East, the herdsmen crisis in the Middle Belt, and disruption in the Niger Delta. Economic growth is a better platform for politics than a recession.
Following the Naira/US dollar devaluations in 2016 and 2017, average annual domestic inflation increased from 9.00% y/y in 2015 to 16.55% at the end of 2017. The job of the Central Bank of Nigeria (CBN) was to both stabilize the currency – and the exchange rate has been broadly stable since August 2017 – and to bring down inflation. Early in 2018, the CBN began to win the battle against inflation and so it brought down the risk-free rate, which it sets with its open market operations (OMO).
Later in the year, the Monetary Policy Committee (MPC) of the CBN began to express concern about the level of foreign investor participation in Nigeria’s fixed income markets and the danger posed to foreign exchange reserves if those investors left. Soon afterward (in August) the CBN began to raise the risk-free rate so that foreign investors would continue to invest in OMO bills and T-bills. This policy has succeeded, in our view, in keeping foreign exchange reserves high (currently US$42.4bn) and the currency stable.
On the other hand, a risk-free rate 587bps above inflation might seem excessive in the context of domestic growth. And a slightly lower spread over inflation might be judged possible when it comes to attracting Foreign Portfolio Investment (FPI). Therefore, if inflation trends down towards 10% y/y towards the middle of this year (the CBN’s target range is 6% – 9%), then we may see interest rate cuts. These could appear in Q4 2019, less likely in Q3.
By Coronation Research
Is Zenith Bank thriving on the strength of sound financial indices?
Zenith Bank posts N103.8bn profit in half-year financial result.
Sound financial indices have made Zenith Bank one of the largest banks in the Nigerian banking Industry. It was recognized as the Most Valuable Banking Brand in Nigeria 2019, in the Global Banker magazine Top 500 Banking brands; and Best Commercial Bank in Nigeria 2019, by the World Finance.
Zenith Bank has successfully bolstered this narrative even further with the release of its Half Year 2020 Financial Report, where it closed with a profit of N103.8 billion.
Growing profit position in these perilous times, speaks remarkably of the suppleness and elasticity of any establishment. A lull in economic activity caused by inflationary pressures, precariousness of the market, and the coronavirus pandemic has forced most Deposit Money Banks (DMBs) to cave in, and reveal achievements worse off than their 2019 results y/y – but not Zenith Bank Plc. The institution has showcased beyond reasonable doubt, that the apparent limitations are incapable of distorting its active growth pattern.
Zenith Bank closed H1 2020, 16.8% better off than it did in 2019 y/y, in terms of profit after tax. Although this massive leap, hugely resulting from tax paid as profit before tax, noted just a 2.2% growth. Further analysis of its HY’2020 results, demonstrates more efficiency, a focused cost of fund optimization, and an aggressiveness in generating income across its business heads and segments. This strategy had begun since 2018, and was shared by the bank when it disclosed planned implementation of an improved core banking system, hoping it would ultimately enhance efficiency while reducing costs.
Zenith Bank has thrived on the strength of its sound business model, corporate governance, conservative risk management, and strategic corporate social investment. The bank has been very forceful in the market, improving massively across all of its income generating segments, despite the plausible and obvious hindrances. This is a testament to its superiority, and sponsors its claim for supremacy.
The bank made N22billion from foreign exchange revaluation gains and despite evidence to the contrary, it endeavored in operating expenditure (OPEX). OPEX may have grown by 7.7%, but disclosures and note to the accounts shows that in virtually every expense head, costs dropped. The 7.7% was triggered majorly by Information Technology related costs, fuel and maintenance, and an increase in the compulsory banking cost fund, set up for the Asset Management Company of Nigeria (AMCON) by the CBN.
Now, like every hero susceptible to their hubris, Zenith has its own problems, which questions its position at the top. Yes, the bank may have an amazing and constantly improving interest expense to interest income ratio, but it does not possess the finest result in this regard as of yet. HY 2019 interest expense took as much as 33.6% of its income, while HY 2020 dropped to 27.4%. This is good, but still considerably high, if we carry out a peer-to-peer analysis with Guarantee Trust Bank Plc (masters of low-interest expenses), whose ratio stands at 16% for HY 2020.
However, Zenith has sustained the momentum of positioning itself as the crème de la crème in the Nigerian Banking Industry for quite some time. The bank’s pattern of growth and performance, strongly indicates its capabilities to manage its interest expense in subsequent quarters. It will be interesting to see how this pans out by year end.
In summary, despite economic difficulties this year, with most bank’s bottom-line at a worse position than the corresponding period last year, Zenith posted improved profit yet again. Could this be enough to portray supremacy?
UBA Plc H1’2020 results, a true reflection of its rightsizing decision?
UBA’s H1 2020 result is yet another demonstration of the resilience of its business model.
The upward review in benefits of some employees and directors this year, coupled with the rising operational costs, constitutes the hot topics from the 2020 semi-annual results released by UBA Plc.
Widely regarded as the banking sector’s largest employer of labour in Nigeria, the bank in December 2019, embarked on a ‘rightsizing’ exercise, which partly resulted in new hires, as well as promotions, improved remunerations, and benefits for existing employees.
The Group Head, Media and External Relations, UBA Plc, Nasir Ramon commenting on this said, “over 5000 staff of UBA Plc, started the new year with a lot of cheer, as the bank promoted to new grades, coupled with salary upgrades. Beneficiaries of this exercise will receive up to 170% increase in their salaries and benefits, whilst a good number have been moved to higher grade levels.”
Directors saw their emoluments amplify by 177.7% (Fees and Sitting allowances) as demonstrated in the financial statements of the bank. Rising to N50million in June 2020, from N18million in 2019 y/y.
Now, Deposit Money Banks (DMB’s) might be adjudged to be honorable in all of their objectives, but the truth is they are neither self-sacrificing nor are they expected to be. DMB’s are established for profit, and would incessantly prioritize business good sense over social empathy, for the sake of their owners. The import of this is, UBA Plc expects its colossal investments in employees and directors to overwhelmingly reflect in its bottom-line.
Half-year 2020 results is clearly not in sync with this philosophy, as it reflects a weakened position compared to the corresponding period last year, despite the investments in human capital. Profit before tax dropped by 18.7%, from N70.3billion recorded in HY’2019 to N57.1billion in the current period. Profit after tax waned as well by 21.7% to N44.4billion from N56.7billion in HY’2019.
Interestingly enough, the top-line fared pretty well. Interest income and fee income showed improvements, albeit marginally by 0.3% and 6.7% respectively. This makes it illogical to attribute the entirety of the decline in profit to the recent austerity measures put in place by the CBN, reducing funds transfer fees and card maintenance charges.
The Coronavirus pandemic played a big role too, by widely stunting the economy in the second quarter of 2020, and negatively impacting profit. But even these do not provide substantial and sufficient convictions as to why the Tier-one bank did not hit the profit-bar it set for itself, from its truly emphatic 2019 financial year. Does this mean that UBA Plc got the decision wrong at the start of the year?
Six months seem too short a period to immediately class management’s decision to jack up the benefits and emoluments of its internal customers as a failed one. Although, no one anticipated the travails of COVID-19 and its resulting consequences, investments in human capital is widely proven to yield tremendous growth in the long haul. Besides the fact that it has given UBA Plc a solid reputation in the market place, it also makes the company very attractive to the very best of industry talents. Furthermore, employee engagements of this nature, foster brand loyalty which ultimately trickles down to how passionately these personnel undertake their tasks and deliverables. The true bearing of this investment is expected to reflect in due course, in subsequent quarters.
Commenting on the result, UBA’s Group Managing Director/Chief Executive Officer, Mr Kennedy Uzoka said, “Our H1 2020 results is yet another demonstration of the resilience of our business model in an extremely uncertain and tough operating environment. We recorded commendable growth in our underlying business in terms of customer acquisition, transaction volumes, and balance sheet whilst inflation, depressed yield environment and exchange rate volatility impacted our net earnings as anticipated.”
In today’s increasingly aggressive marketplace, where consistently generating revenue, is paramount to preserving the longevity and going-concern status of any establishments, costs must also be accorded as much attention and significance. Tightening and managing costs with the aim to improve and generate profit is genius strategy especially in today’s banking industry. The banking industry is under threat from ruthless competitions. Multifarious streams that had hitherto been available for generating income for DMB’s are being severely hindered by the ‘austere’ policies (from the perspective of commercial banks) from the apex bank, making effective cost management a survival mechanism.
Explore the Nairametrics Research Website for Economic and Financial Data
Employee benefits rose by 20% from N37.2billion in HY’2019 to N44.6billion in HY’2020, while Directors’ emoluments (Fees and Sitting Allowance) as earlier stated, surged by 177% from N18million in 2019 to N50million in 2020 y/y. The total operating expenses increased 22.6% in 2020. UBA Plc, unavoidably expended N22.4billion on Banking Sector Resolution cost trust fund, in compliance with the CBN’s requirement to contribute to the cause of the Asset Management Company of Nigeria (AMCON). Security and other payments for core services experienced increase as well compared to the preceding year.
Avoidable expenses like Penalties and Premises Maintenance Charge, should be extensively reviewed and extinguished wherever possible, to improve bottom line. UBA plc has forked out N565million in penalties so far in 2020, representing 6177.7% increase from just N9million in 2019 y/y. This is a prime example of the operational brick walls, UBA Plc must properly address to improve its fortunes in subsequent quarters.
Finding Balance: GTB’s impeccable gains versus its notable losses
Bank’s strategy of increasing gains while seeking out ways to decrease its losses is on a true course to growth.
Guarantee Trust Bank Plc (GTBank), over the past few years, has taken the Nigerian banking industry by storm, particularly through the foresight and strategic actions of its management.
The bank has, over time, tactically built its operations and expanded its market share, earning its spot as one of the credible names in the Nigerian banking space.
Faced with challenges like increase in the loan-to-deposits ratio (LDR) instituted by the CBN, and the COVID-19 pandemic that got companies in the financial sector thinking of new ways to survive, GTB may have found its way out.
Overview of its half-year results
Net interest income increased by 9.7% to N127.6 billion in H1 2020, compared with N116.4 billion in H1 2019. Its Profit before income tax stood at N109.7 billion in H1 2020, compared with the N115.8billion in the corresponding period in 2019 – a decrease of 5.2%.
Somewhere in-between the good and the not-so-good, the bank has been able to round off its earnings to a balanced output for H1 2020.
The good: Foreign Exchange gains
One of the best happenings to investors this year, is the extreme volatility of the forex market – among other currency and commodity plays. In H1 2020 period, the company’s financial assets at fair value through profit or loss, was up by 91.6% to N140.8 billion, when compared with N73.5 billion in H2 2019.
Interestingly, this was due to 129.2% increase in treasury bills from N56.9 billion in H1 2019 to N130.5 billion in H1 2020. Through forward foreign exchange contracts and currency swaps, they were able to increase derivative assets by 49% from N188.6 billion (notional contract amount) in H1 2019 to N280.9 billion in H1 2020.
Explore the Nairametrics Research Website for Economic and Financial Data
Foreign exchange revaluation gain in the half-year period was significantly boosted, from N2.6 billion in H1 2019, it attained 723% growth to N21.9 billion H1 2020, and it was a major reason for the 28% increase in other income within the period under review. Deposits from customers were also higher by 18.5% to N3 trillion. While loans and advances to customers increased in line with the apex’s bank directive. This could be both a bad thing and a good thing, depending on the level of credit risk.
The not-so-good: Impairment losses, CBN’s penalties
Following CBN’s issuance mandating commercial banks to increase the percentage of customer deposits that were loaned to 65%, so as to effectively stimulate the economy, stringent penalties had been imposed on non-compliant banks by the apex bank.
Consequently, the company’s restricted deposits had increased to N1.054 trillion, owing to its limitations in full compliance. While its increased cash balance of 27.8% in the period under review, could signify that the worst of the challenge is over (particularly following the comparative reduction in cash in Q1 2020), a cursory look at the reason for the strengthened cash position, is the 75.7% increase in money market placements to N333.5 billion – another positive for the bank.
Loan impairment charges in the half-year period, increased by 209.7% from N2.1 billion to N6.8 billion, and this was as a result of increased provisions for expected credit losses on financial assets extended to its customers, no doubt as a result of the economic uncertainties, synonymous with the period under review.
Commenting on the half-year results, the CEO, Segun Agbaje, noted that; “Going forward, our focus is not just to survive this pandemic, but to thrive beyond it. That is why we are going ahead with our plans to re-imagine how we create value for all our stakeholders.
“We know that making financial services work for customers goes beyond banking, and in line with our long-term strategy, we will seek to create and drive innovative financial solutions that go beyond banking.”
The bank’s Return on Equity (ROE) of 26.8% is currently one of the best in the industry, and a testament to this promise. Its strategy of increasing gains by focusing on its strengths, while also seeking out ways to decrease its losses, is one that will set any organization on a true course for growth. GTBank is certainly on that path.