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Published On: Tue, Feb 6th, 2018

Renaissance Capital Projects Recovery Path For Nigerian Banks

Russia’s investment banking firm, Renaissance Capital (RenCap), has outlined a recovery path for Nigerian banks as they navigate the 2018 financial year as the economy consolidates on weak recovery.
The Bank reputed for insightful market analysis, in a report titled: Nigerian Banks: The Path to Recovery lists indicators of improvement in the Nigerian banking sector that point to the recovery.

“Things appear to finally be looking up for the Nigerian economy after a challenging few years. More important, however, is how this translates to an improving asset quality outlook for the Nigerian banks. We think sector NPLs are close to their peak, and we expect higher oil prices will have direct implications on loan performance. We believe capital buffers will rise as profits improve and note that the banks are increasingly more comfortable using an exchange rate of NGN330/$ – an average of the official rate and Investors and Exporters (I&E) window rate (vs NGN306/$ previously) – to value their foreign currency portfolios. We take this to mean potential revaluation gains in 4Q17, which we think could offset any negative asset quality surprises, it said.

In terms of asset quality improvements, the prognosis is that short-term investment thesis for the banks partly hinges on a lower cost of risk (CoR) in FY18, in the view of RenCap. FBNH and SIBTC could surprise positively in this regard. “We believe that the other tier 1 banks, specifically, GTBank, Zenith, UBA and Access have limited scope to record improving CoR numbers in FY18, considering that even in a challenging macro environment (between FY14 and 9M17) these banks only reported an average CoR between 1.0 and1.8%.
“Despite a positive macro backdrop, we believe 2018 will be a recovery story at best; earnings growth will be challenged by the declining yield environment, volatility in FX-related gains, and limited scope for cost efficiencies. Tough economic decisions are likely to be delayed till after the 2019 general elections, but the political risks that come with a pre-election year render us cautious on the recovery ahead. We assess the evolution of non-interest revenue (NIR) over the past few years, and believe that the smaller banks such as SIBTC, Diamond and FCMB should see less volatility in NIR given the relatively higher contribution from stronger more sustainable income streams such as e-banking business and services.
“We believe earnings resilience will also be demonstrated by net interest margin (NIM) protection. We are less concerned about the declining yield environment at Access, SIBTC and FCMB, as we expect improvements in the cost of funds (CoF) will more than offset asset-yield pressure. Our top picks in the sector remain UBA and Access on upside potential and valuations, but we also like FBNH and SIBTC, as we believe both banks have scope to report lower CoR in FY18. We like GTBank given the quality of its earnings but believe that current valuations are full, said RenCap.


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