Nigeria’s leading banks performed remarkably well in the first nine months of 2020 as their earning results under review printed much lower-than-expected loan loss provisions, coupled with exceptional revenue from the banks’ trading portfolios and mark-to-market gains.
EFG Hermes in its recently released report attributed such stellar performance under review, on the materially lower risk charge to Nigeria’s Central Bank lenient forbearance policy, thereby aiding Nigeria’s banks to restructure a significant proportion of loans impacted by COVID-19 (43.02% of total sector loans were restructured as of September 2020) and not requiring them to make adequate provisions on these loans.
The investment bank anticipated Nigeria’s leading banks’ earnings in 2021 will remain under pressure in the near term, on the bias that the cost of risk to remain elevated at 1.6% as the macro and regulatory environment remains weak coupled with some of the restructured loans of the affected banks to become Non-Performing Loans once their forbearance period ends.
The report also predicted the total sector assets to drop on average by 0.8%, as banks remain risk-averse and some of the liquidity the sector attracted last year exits the system; and a 4.2% Y-o-Y decline in aggregate non-interest revenue due to no recurrence of exceptional revenue (loan loss recoveries, FX revaluation gains, etc.)
Consequently, the research analysis, however, upgraded Union Bank, UBA, First Bank, Zenith Bank to Buy;
- The Investment upgraded its rating of Nigeria’s most profitable bank, Zenith to Buy (from Neutral; TP: NGN29.1) on the bias that it expects a more resilient Return on Equity outlook due to continued strong trading income and lower risk charge.
- FBN (TP: NGN10.6) and UBA (NGN10.4) was also upgraded to Buy (from Neutral) due to a decline in risk charge forecasts and strong fee income growth for the former and strong non-Nigeria profit contribution for the latter.
- Furthermore, Access Bank rating was upgraded to Neutral (TP: NGN9.7), from Sell, due to stronger-than-expected asset growth and lower risk charge.
The downgrade of GTB & Stanbic IBTC;
- The research report from EFG Hermes downgraded Stanbic IBTC to Neutral (TP: NGN39.1) on the bias it believed the business units will come under regulatory pressure.
- Nigeria’s most valuable bank, GTBank was downgraded to neutral (TP: NGN33.2), on the consideration of declining leverage and macro/regulatory-induced headwinds to its ROE outlook.
Looking ahead, given other macro challenges and the Nigerian apex bank’s priorities, the research report predicts the regulator will continue to adopt a more lenient policy on recognition and provision of NPLs.
In addition to a favourable policy environment, the rebound in Brent crude prices and economic activity should mitigate a full-scale asset quality crisis.
Therefore, EFG Hermes reduces their average FY20e and FY21e cost of risk estimates to 1.6%, from 5.3% and 4.7% respectively.