TUESDAY JUNE 28 2016-We may hope that this Ramadan period will bring us market sanity that can make our wishes for the economy come true, but it is very important to note that ‘reactive’ policies do not bring the quick results easily. Renaissance Capital analysts say they are however changing their bearish call on the economy and called a BUY for some top Nigerian banks, thus affirming their long term view on Nigeria. Here is what they think over all;
Some of the key factors that coloured our views in Nigerian banks – Navigating stormy seas (21 January 2016) have changed. The most significant are: 1) the 40%-plus naira depreciation and the liberalisation of FX markets; and 2) the rise in interest rates. While we believe these developments could improve sector earnings in the near term, global risk sentiment will be key to price performance and capital inflows. We have updated our forecasts and our top picks are now Guaranty Trust Bank (on fundamentals) and United Bank for Africa (UBA; on upside potential). We maintain our BUY ratings on Zenith and Access, and upgrade FBN Holdings and FCMB to HOLD (from Sell).
FX liberalisation and Brexit
The liberalisation of FX markets on 20 June led to positive sentiment in the equities market, with banks in our universe up by 9% since the Central Bank of Nigeria (CBN) governor announced his plan on 15 June. However, sentiment risks being dampened by concerns around Brexit and the implications for the naira, as capital inflows may not materialise as rapidly as the CBN may have expected. We have used a NGN285/$ exchange rate in updating our models but the risk is to the downside, and our Sub-Saharan Africa (SSA) economist Yvonne Mhango forecasts NGN390/$ by YE16. For the banks, we expect real loan growth to be minimal, but given that 46% of sector loans were in FX in FY15, we estimate nominal credit growth post depreciation could end the year at 23% on average, using FX of NGN300/$.
Life after a 40%-plus devaluation
We expect rising interest rates to be net positive for the larger and more liquid banks. Naira depreciation is also positive for FX margins. A number of banks have varying FX long positions. Given the potential for the naira to weaken beyond NGN300/$, we think these positions will be crucial in providing the banks with a capital and asset quality buffer. FBNH, GTBank, Access, UBA and Fidelity seem to have the most significant net long FX positions, based on our discussions with management teams. Where NPLs are in FX, this is negative for NPL ratios; and if the provisions on these are held in naira, it is even more worrisome. We have the most concerns on this front for FBNH, Diamond and Skye. Capital ratios could come under some pressure but we think investors should focus on the banks that are starting from a relatively strong base and have net long FX positions that provide ample buffers. Should a bank breach the minimum CAR requirements, we do not think – based on our discussions with the banks – that the CBN would do anything drastic beyond placing a freeze on credit growth, mandating the sell-down of some assets, capping or freezing dividends to help generate internal capital and requesting a capital improvement plan.
BUY GTBank, UBA, Zenith, Access
We have reviewed our sector forecasts and maintain BUY ratings on GTBank, Zenith and Access. Today (27 June), we upgraded UBA to BUY in UBA – Africa rising. We maintain HOLD ratings on Stanbic and Fidelity but upgrade FBNH and FCMB to HOLD (from Sell). We maintain SELL ratings on Diamond and Skye. Overall, our universe is trading at 0.5x FY16E P/B, on our estimates, ranging from 0.1x at Skye to 1.5x at GTBank. GTBank and UBA are our top picks.
