Nigerian banks have improved non-performing loans (NPLs) post-recession. However, our study shows certain sector NPLs have deteriorated. Real Estate, a significant component of GDP, has also recorded impressive moderation in NPLs, notwithstanding its declining contribution to GDP.
So far in September, the CBN’s gross foreign exchange reserves have shed US$1.19 billion, 2.75% of its value to US$42.16 billion. Foreign Portfolio Investment (FPI) flows into the country has significantly fallen. For Q3 2019, FPI flows fell by 50.30% q/q to US$2.04 billion, accounting for just 26.71% of inflows (compared with Q2 FPI flows which accounted for 61.31% of FX inflows). With the fragile state of the global economy, investors are increasingly picky with what countries attract their investments.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity rose by 1bps to 14.39%, and at 3 years rose by 14bps to 14.27% last week. The yield on a 364-day T-bill rose by 5bps to 15.15%. The yield on a T-bill with 3 months to maturity rose by 53bps to 12.70%.
Our oft-stated view that one-year risk-free Naira-denominated rates need to trade 250-300bps above inflation is now challenged as rates are trending at 413bps above August’s inflation print of 11.03%. This positions Naira-fixed income assets favourably relative to other emerging markets.
The price of Brent fell by 3.69% last week to US$61.91/bbl. The average price, year-to-date, is US$64.81/bbl, 9.60% lower than the average of US$71.69/bbl in 2018, but 18.38% higher than the US$54.75/bbl average seen in 2017.
Brent crude saw its biggest weekly decline in the month of September last week on the back of easing tensions in the Middle East; and positive developments in the US/China trade war. Following the United Nations (UN) climate change summit in New York last week, about 130 international banks have signed the Principles for Responsible Banking, which entails their commitment to fully supporting the implementation of the Paris Agreement, by decreasing hydrocarbon investments while promoting renewables. While the world is still some odd decades away from reduced reliance on oil, the threat this poses should not be ignored, especially for an oil-dependent nation like Nigeria.
The Nigerian Stock Exchange (NSE) All-Share Index fell by 0.09% last week, pushing the year-to-date return to negative 11.95%. Last week Seplat (+21.00%), Nestle Nigeria (+11.15%) and Lafarge Africa (+5.96%) closed positive while STANBIC IBTC (-11.32%), CCNN (-9.94%) and Presco (-9.93%) fell.
The NSE, last week, recorded only two positive trading sessions out of five as sell pressures persisted in the market. With little to no improvement in investor sentiment, we see trading activity in the equity space being tepid. We reiterate our view that select stocks are trading at historical lows and might pose as good entry points for strategic investors.
A better NPL picture
Post-recession, banks have taken prudential actions together with restructuring to pare the level of non-performing loans (NPLs) in the industry. The tier-one banks achieved this without suspending dividend payments to shareholders. Recently, some of the tier-two banks have announced recoveries against their NPL levels to further improve the industry outlook.
However, NPL’s in the Power and Energy sector have deteriorated. NPL’s rose by 34.83% y/y in Q2 2019. This state of affairs in the Power and Energy industry stands at variance with the rest of the private sector as it remains the only private sector segment with deteriorating NPL as at Q2 2019.
Moderation of NPLs from the Oil and Gas sector was 193 billion, the largest nominal change recorded y/y and more than 2x the level of moderation in the Real estate sector, the second-largest source of NPLs. Communications completes the top three sectors with the largest NPLs.
While we can point to improving oil production to corroborate the improvement in NPLs in the Oil and Gas sector, the development in the Real Estate segment is less clear. For one, the share of Real Estate as a component of GDP has been declining. Also, in 10 of the last 11 quarters, Real Estate posted negative growth rates and occupancy rates have not improved significantly. Finally, the stock of credit to the sector is only 78% of its size in Q2 2018, which is the most severe contraction across all segments.
[READ ALSO: Nigeria Weekly Update by Coronation Research]
There is, however, some positive news. An increasing number of residential Real Estate managers are creating more flexible structures around financing for prospective occupants. Also, it appears these managers are in possession of new data or at least acting on demand-driven data to style existing residential spaces to match the economics of the mass market. Concepts such as ‘shared spaces’ and ‘short-lets’ seem to be an increasing favourite for occupants and property managers alike, showing a change in attitudes.
#ENDSARS Protests: Why this is different
The #ENDSARS is not just a protest about rogue police officers, it is larger than that and this is why.
In June 2019, the Hong Kong Government revealed plans to implement a controversial law that allows the extradition of Hong Kong citizens to mainland China.
As the government dithered, pockets of protests broke out, which triggered clashes with Policemen that most protesters viewed as excessive. Within days, protesters went from a few thousands to over 2 million, the largest in the history of Hong Kong.
By the time the government decided to pull back the bill; the protesters, many of them young, were already demanding for more than just a withdrawal of the bill. They wanted the police investigated and prosecuted for using excessive force, amnesty for protesters, and a right to vote for all.
The protests lasted for about 6 months only to be dissipated by social distancing requirements, due to the COVID-19 pandemic. Before then, protesters had grounded the economy, which drove the Hong Kong economy into a recession and $3 billion in stimulus.
Nigeria is experiencing its own version of protests similar to that of Hong Kong, except that it does not have any money to inject as stimulus. The latest protests were triggered by anger over the alleged violent killings and extortion by the controversial anti-robbery unit of the police, known as SARS or FSARS.
For years, young Nigerians, mostly via social media, have called for the unit to be disbanded and rogue elements in the force brought to justice. Despite repeated promises by the government, they have failed to heed to their demands, triggering a new wave of protests that has now spread across the country.
From demanding an end to SARS, prosecution of rogue police officers, and reforms; Protesters are more emboldened, threatening to continue if all their demands are not met. The government is scrambling to contain a situation that is escalating and could dangerously metamorphose into violent clashes with authorities, leading to loss of lives and destruction of properties.
There is also fear that this week’s protest could be sustained for more days, if not weeks. You only need to look at the economy of the Nigerian Youth to understand why this is such a critical moment.
According to data from the National Bureau of Statistics, Youth unemployment is at an all-time high of 34.9%, making up 64.3% of total unemployed Nigerians. University students have also been at home for months, due to the 7 months ASUU strike.
Their parents are also facing tougher economic conditions with inflation rate galloping past 13%, after multiple devaluations and the removal of fuel subsidy. It was just a matter of time for them to find a rallying point to vent their frustration.
There is still a window for the government to de–escalate tensions, and it is not just by accepting the terms of protesters on paper and making bogus pronouncements. Nigerian youths want concrete actions and it starts by making immediate changes in the leadership of the Police – the rogue unit in particular. Officers suspected of murdering innocent Nigerians need to be made to face justice.
The government also needs to urgently resolve its dispute with the Academic Staff Union of Universities (ASUU) on the Integrated Payroll and Personnel Information System (IPPIS). Students and young Nigerians also need to be offered grants and palliatives to help them cushion the effects of an economic crunch that is in no way their making.
Proceeds from the Nigerian Youth Investment Funds should be disbursed immediately to those who have applied. The government also needs to introduce student loan schemes for millions of Nigerian youths, who can’t afford to pay for quality university education.
The National Assembly also needs to introduce laws that protect young Nigerians from police brutality, status profiling and wrongful arrest. Investments in mega tech hubs across the country, establishment of recreation zones in major cities must be carried out by State Governments, to keep them engaged in activities that can better their lives.
No investor, local or foreign will put money in any country where its youths are in a long-drawn protest with the government. As the economic cost of the protests for the last few days continues to mount, the negative effects could be more dire than a deeper recession.
#ENDSARS does not just represent a protest against rogue Police officers; it is a symptom of the poor state of the economy, which for months has only gotten worse. Fortunately, the agitation can still be managed but time is running out.
Thrive Agric: “Where is my money?”
AgriTech firms make promises of mouth-watering returns, but what they do not reveal loud enough is just how risky the investment is.
Fund a farmer, make a profit! Thus, says Thrive Agric, a popular AgriTech company that crowdsources funds from investors in exchange for a profit. The business model appears simple and easy for any basic investor to understand.
When you invest through them, they pool your funds along with other investors and then invest the collective sums in farms across the country. When the farmers harvest, they sell the farm produce at a profit, receive the cash, and split among investors who contributed to the pool. The company keeps a commission for itself. It all makes business sense, except for one thorny challenge – It is highly risky.
Explore Data on the Nairametrics Research Website
Last week, a Twitter user posted a tweet demanding a refund of his investment in Thrive Agric – almost a million naira. The company lamented that they could not pay him, because they had experienced losses due to the COVID-19 pandemic. The investor was taking none of the excuses, resulting in a name and shame on twitter that has since gone viral.
AgriTech Investments as they have come to be known has gained popularity as a viable investment option for Nigerians, who are still afraid of investing in the stock market. The largely unregulated sector leverages technology, an easy and relatable business model, and the promise of a mouth-watering return to yield-hungry investors. What they however do not reveal loud enough is just how risky the investment is.
Farming in a country like Nigeria is a highly risky venture that relies on a value chain that is fragmented, full of middlemen, and largely inefficient. Nigeria’s average yield per hectare is one of the lowest in the world, largely due to lack of farming inputs such as fertilizer, irrigation, and insecurity.
AgriTech firms like Thrive Agric face these risks when they pool money from investors and pass on to farmers. Though part of their role in the investment scheme includes monitoring how the funds are utilized by farmers, they have no control over several risk factors such as the impact of COVID-19, which they alluded to as the challenges for not being able to pay investors.
Perhaps, if they disclose the inherent risks in the business, investors will be better informed and size up their risk against the returns. A cursory look at the company’s website reveals there is nowhere that it is mentioned that there is a risk of not getting all or part of your money when you invest. It probably would ruin the pitch if they did.
This is why when you visit their website and that of their competitors like Farmcrowdy (who pioneered this business) what you see are testimonials of just how well the investments are doing. You could argue that they had not defaulted in any of their previous rounds, so there was no need to say otherwise.
However, alerting investors about the inherent risks in a crowdsource investment scheme is not only responsible but a matter of best practice and compliance. The Security and Exchange Commission (SEC), noted this in its draft Exposure on Proposed News Rules guiding crowdfunding. Section 9a (iv) states that the crowdfunding company is expected to share a general risk warning on participating in funding through the company’s platform.
It also requires in Section 14 that they must publish on their website that “Investing through an online portal is risky and Issuers raising funds through the portal include new or rapidly growing ventures,” and that “Investment in the businesses hosted on the portal is very speculative and carries high risks; Investors may lose their entire investment and must be in a position to bear this risk without undue hardship.” This proposed compliance requirement is not been done by most AgriTech firms.
If this had been published on its website and duly communicated to its potential investors, we may have avoided the embarrassing and reputation damaging question that any fund manager wants to avoid – “Where is my money?”, especially if they don’t have it.
First Bank is cutting inefficiencies and focusing on its strengths
While the bank has everything to be thankful for, care should still be taken towards driving its growth objective.
Being the first entrant to any industry, no matter how lucrative, is only an advantage when there is zero competition. In the real world, for any business to stay in the game, it must constantly innovate, expand its market share, and carry out the necessary moves to survive the equally changing business and economic landscape. First Bank being the premier bank in West Africa has undoubtedly witnessed this change over time. If there is one thing the bank has done, it has stayed relevant through decades, even after many that came after it have fallen by the wayside.
The year 2020 had forced many businesses across the world to reassess their positions, and a strategy many have adopted is cost cutting – for good reasons. Given the economic and financial constraints with limited resources, cutting operational inefficiencies and focusing on areas that offer the best value has proven to be worth the effort for many. While the COVID-19 pandemic might not have had anything to do with FBN Holdings cutting off its risk underwriting business, FBN Insurance ltd, the company made the decision within the year and it couldn’t have come at a better time than when it did.
First Bank’s performance in Q2 2020
Like most companies, First Bank’s revenue (Net interest income) took a hit as stated in its Q2 2020 Y-O-Y results. Net interest income dropped by 7.34%, from N141.7 billion in Q2 2019 to N131.3 billion in Q2 2020, following significant reduction in investment securities over the quarter. Profit before tax grew by 14.3%, from N36.2 billion to N41.4 billion for the period under review. Profit after tax grew by 56.3%, from N31.6 billion to N49.5 billion year on year.
Operating expenses also increased by 0.9% y-o-y from N137.9 billion to N139.2 billion; while it suffered impairment charge for credit losses of N30.7 billion from N22.1 billion in Q2 2019. Its Gross earnings increased by 5.8% to N296.4 billion, from N280.3 billion in the period under review.
Divesting from its risk underwriting arm and its capital injection
FBN Holdings completely divested from its risk underwriting arm, completely selling off its 65% stake in FBN Insurance Ltd to Sanlam Emerging Markets (Proprietary) Ltd. effective from June 1st, 2020.
According to the group, “we successfully divested from the underwriting (insurance) businesses, to focus on our banking operations. We are confident this will enhance greater value to our stakeholders and strengthen the Group’s resolve to consolidate its leadership of the banking sector.”
This single action did many things for the bank. Following the divestment, the holding capital, FBN Holdings, had injected equity capital of N25 billion into the bank, thereby boosting its overall Capital Adequacy Ratio to 16.5% (excluding profit for H1 2020). In a similar vein, the bank’s total assets was boosted by 14.9% year-to-date from ₦6.2 trillion as at Dec 2019 to ₦7.1 trillion in June, 2020. By pumping the required capital into the bank, it was able to effectively mitigate the regulatory requirements that many banks have struggled with over the past few months. Not only does it have a comfortable buffer against regulatory requirements; it has the available financial resources to look out for emerging business opportunities, and fully deepen its strengths in its core business areas.
While the bank has everything to be thankful for, with the play of events; care should still be taken towards driving its growth objective. In truth, its financial position excluding the capital injection does not particularly reveal new strengths. Hence, a false sense of security, given the current economic challenges amidst the COVID-19 pandemic and all the challenges it births, like possible increase in impairment provisions, ailing investments, and so on, could have the company dissipating its newly injected capital.
For investors, while an amazing growth opportunity does exist especially given its new resources, the best bet is to hold as a dividend stock, patiently waiting for its long-term growth strategies to play out in the years to come.