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Q3 earnings: Banks set to sustain positive performance

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Q3 earnings: Banks set to sustain positive performance

As another earnings season gets underway, there are indications that deposit money banks (DMBs) will sustain the impressive performance reported for the first half of the year, writes Tony Chukwunyem

With Q3 earnings season already underway, financial analysts are  looking out  to see whether Deposit Money Banks (DMBs) will be able to replicate the positive results they reported for the first half of the year especially given the fact that the economy came out of recession in the second quarter of 2017.

Improving macro environment

In fact, in a recent note, analysts at FBNQuest predicted that Nigerian banks are likely to sustain the generally positive performance they posted in the first half of the year in H2 2017 due to the improving macro environment.

The analysts stated: “The macro environment is stable to improving, with the recession behind us. We expect oil prices to be stable, and provide support to the naira (boosting liquidity in the fx market in the process). We forecast Gross Domestic Product (GDP) to grow 1.6per cent in 2017E, compared with -1.6per cent in 2016. Although the banks face reinvestment risk in their fixed income portfolios given the recent movement in yields, we believe they are adept enough to continue to grow their revenue as the last two years have shown.”

The analysts also pointed out that lenders have been able to keep asset quality risks under control with the Non-Performing Loan (NPL ratio) of lenders in their universe averaging 5.4per cent in Q2 2017.

According to them, while restructurings have helped to curb the NPLs, the Central Bank of Nigeria (CBN), “deserves some credit for strengthening banks’ risk management processes after the last crisis.”

They emphasised that while they expect some deterioration in asset quality in H2, it would not be, “a doomsday scenario.”

“We forecast a year-end average NPL ratio of 6.1per cent, with all except Diamond Bank (12per cent) reporting ratios in the mid-single digit range. Tier 2 banks Diamond and FCMB face the highest risk from asset quality deterioration given that their capital ratios are the lowest in the group – 15.4per cent and 17.3per cent respectively,” the analysts said.

Banking sector outlook

Similarly, in a report released last week, analysts at CardinalStone Research highlighted factors that they said would positively impact banks’ third quarter earnings.

As the analysts put it: “In Q3’17, we expect banks to continue benefiting from attractive yields on fixed income. Thus, we project an average growth of 29.0 per cent YoY in interest income across our coverage banks in 9M’17. In recent times, the CBN phased out the one year OMO bills, which moderated yields in the fixed income space (yields on 364-days bills fell by 400bpsin the last one month), but we believe the impact will be negligible on Q3’17 performance given that the easing started in the last month of the third-quarter.”

Forex liquidity boost

The analysts also predicted that they expect banks with strong forex liquidity to again enjoy derivative income in Q3’17 as they did in the first and second quarters.

They stated: “For non-interest income, we expect UBA, Zenith Bank and Access to continue to report strong numbers from derivative transactions given their strong dollar liquidity following their Eurobonds Issuance in the last few months. Also, with the overall improvement in FX supply both in the interbank and Investors & Exporters (I&E) window, we expect a spike in income from trade related transactions to consequently boost non-interest income in 9M’17.”

However, the analysts said they expect banks’ impairment charges to remain high in the third quarter.

“Our view is that impairments across our coverage banks will remain elevated in 9M’17, rising further by an average of c.14 per cent as banks continue to battle the lag impact of the economic recession. Consequently, we believe cost of risk across coverage banks will remain relatively high compared to pre-recession levels. On the syndicated 9mobile loan, we expect exposed banks to take more general provisions as a necessary prudence measure,” they said.

UBA, Fidelity Bank tipped to stand out

Interestingly, the CardinalStone Research analysts made a strong investment case for two lenders – UBA and Fidelity Bank. 

They stated: “Following the analysis of the H1’17 results of our coverage banks and the corresponding adjustment to our projections and forecast, our top picks are UBA and Fidelity. Our revised target price on UBA (N12.96) and Fidelity (N2.29), present upside potentials of 38.8per cent and 65.9per cent to current market price of N9.34 and N1.38 respectively.

“Our investment case for UBA is premised on its higher earnings diversification as well as better non-interest income given its improved FX liquidity position, following the issuance of $500 million Eurobond. We believe UBA’s strong earnings diversification across Africa (34per cent contribution to total revenue) and good asset quality metrics makes it a choice stock at current price levels. Its strong African coverage also gives it significant room to grow transaction and trade based revenues which may further enhance profitability in the medium term.”

Indeed,   UBA’s 2017 Q3 results released on Monday show that the lender posted Profit Before Tax (PBT) of N78.33billion compared with the N58.80billion it recorded a year ago. The bank also reported a surge in gross earnings to N333.90billion in the third quarter of this year as against the N262.52billion it reported a year ago.

Commenting on Fidelity Bank, the CardinalStone Research analysts stated:  “We are encouraged by management’s effort to improve the quality of reported numbers as it became one of the first tier-II banks to commence routine half-year audit. In addition, our expectations of strong earnings growth (+64.9per cent) in FY’17 coupled with its consistent dividend pay-out culture (FY’17 dividend yield estimate of 16.5per cent) makes Fidelity desirable at current price.”

They further stated: “After revising our earnings forecast, we have raised our target price for Fidelity to N2.29. At current price, our target price presents an upside opportunity of 65.9per cent to current price of N1.38. Hence, we retain our BUY rating on the counter. We are optimistic of the bank’s performance in the short to medium term given the improved quality of earnings report, better operational efficiency, as well as strong earnings outlook.”

Specifically, the analysts said: “We forecast a top-line and bottom-line growth of 16.6per cent YoY and 64.9per cent YoY to N128.7 billion ($422 million) and N14.3 billion ($46.9 million) respectively. Benefiting from elevated yields on government securities and loans, we expect interest income to inch up by 20.0per cent YoY and 0.6per cent QoQ to N109.7 billion and N36.8 billion respectively.

“On the back of improving operational efficiency, we expect operating expense to decline by 3.5per cent YoY to N47.0 billion in 9M’17. We expect Fidelity’s profitability metrics to trend up significantly in 9M’17. Thus, we see return on equity (ROE) improving by 110bps YoY to 7.4per cent in 9M’17.”

It will be recalled that contrary to forecasts that the recession will significantly impact their bottomline, lenders generally posted positive results for the first half of this year.

For instance, Fidelity Bank’s H1 audited results, showed that the lender’s gross earnings rose by 22.1 per cent from N70.3billion in H1 2016 to N85.8 billion for the corresponding period at June 30, 2017. The growth in gross earnings was driven primarily by a 27.8per cent increase in interest income and a 0.7 per cent growth in net fee income to N11.2 billion.

Similarly, profits increased by 66.7 per cent from N6.1 billion in 2016 to N10.2 billion, in the period under review, just as it recorded significant improvement in other key performance indices such as Net Interest Margin of 7.4per cent, Cost Income Ratio at 67.3per cent and Capital Adequacy of 18.4 per cent.

Fidelity Bank’s CEO, Mr. Nnamdi Okonkwo, attributed the double digits growth in earnings and profits to an effective execution of the bank’s medium term strategy, which focused on deepening its market share in the Small and Medium Enterprises (SME), Retail and Digital banking business segments.

“Our balance sheet optimization initiatives continued to deliver improved results as Net Interest Margin (NIM) increased by 7.4 per cent in H1 2017 from 6.4per cent (2016FY), just as the growth in the yield on our earning assets outpaced the increase in funding costs. The process improvement and digital banking initiatives in the period helped to optimize our cost profile as total expenses declined by 1.8 per cent (despite the high inflationary environment), leading to a reduction in our Cost to Income Ratio (CIR) to 67.3 per cent” he stated.

He explained that Fidelity Bank’ retail strategy continued to deliver impressive results in HI 2017 as savings deposits, a measure of customer confidence, increased by 3.9 per cent to N161.1 billion in June 2017 on the strength of improved cross selling of its digital banking products with about 30per cent of customers now enrolled on our flagship mobile (*770#) and Internet banking products.

Last line

Clearly, the consensus in financial circles is that if banks could defy the recession and post positive results in the first half of the year, they are likely to sustain this performance in the post-recession period.

But as a financial analyst, Mr. Clement Okonne, advised, “it is better to wait for the banks to release their Q3 earnings. Yes, the results are likely to be in line with analysts’ expectations, but surprises cannot be completely ruled out.”

Nigeria at 6%,  lags behind Ghana, others

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