Nigerian banks more comfortable using $330/$ to value foreign currency portfolio-RenCap

MON, FEBRUARY 5 2018-theG&BJournal-Nigerian banking sector seem the biggest beneficiaries of the slow but steady recovery of the economy  and analysts at Renaissance Capital, the Investment banking firm believe 2018 will be a recovery story at best.

RenCap’s view is strengthened by what they see  in the sector’s non-performing loan portfolio among others. They say they think the sector Non Performing Loans (NPLs) are close to their peak.

”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,” the firm said.

On banks most likely to benefit on asset quality improvements,  RenCap’s Olamipo Ogunsanya said the short-term investment thesis for the banks partly hinges on a lower cost of risk (CoR) in FY18,. He notes that 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%.”

But there are still some concerns despite a positive macro backdrop. RenCap’s verdict is that 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.”

UBA and Access banks remain the top pick of the sector on upside potential and valuations. But they also like FBNH and SIBTC, because they believe both banks have scope to report lower CoR in FY18. They also like GTBank given the quality of its earnings but believe that current valuations are full.

”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.”

FOOTNOTE: We increase most of the TPs across our sector coverage on our lower risk-free rate assumption of 13.0% (previously 14.0%), following the compression in yields. We forecast the highest upside potential in Access (BUY) and UBA (BUY). We maintain our BUY ratings on FBN Holdings (FBNH) and Zenith, and our HOLD ratings on Guaranty Trust (GTBank) and Stanbic IBTC (SIBTC). We downgrade Fidelity to SELL (from Hold) on what we perceive to be its weak earnings prospects and maintain our SELL ratings on Diamond and FCMB. RenCap
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