FRI. 31 MARCH 2023-theGBJournal | With most listed banks expected to publish full-year 2022 earnings over the coming weeks, Coronation Research in their latest report on Nigeria’s banking sector- ‘’Nigerian Banks: A year of Resilience and Grit’’ ex-rayed the major themes that shaped banks’ financial performance during 2022 and delineate their expectations for FY 2022 results and presented their views on the banking industry for the year 2023. (Note two banks, Stanbic IBTC and Zenith Bank, have already reported FY 2022 results.)
The year 2022 saw the Central Bank of Nigeria (CBN) take a hawkish monetary stance, hiking the benchmark policy rate as well as the Cash Reserve Requirement (CRR). This, together with a rise in government borrowing, drove lending yields up and consequently banks’ net interest margins (NIM). We expect modest FY 2022E performance upside for most of the banks featured here, driven by improved asset yields, although capped by ongoing CRR debits. We expect earnings support from strong growth in Non-Interest Revenue (NIR).
In 2023 we expect the Nigerian banking industry to face pressures stemming from stringent regulations, high inflation, continuous dollar shortages and even asset quality issues. Nonetheless, we expect modest growth in earnings from the banks featured, driven by rising interest rates, a strong contribution from non-interest revenue derived from FX revaluation gains, growth in non-bank businesses and digital banking.
Coronation Research believes Nigerian banks currently trade at significant discounts to peers and thus offer an attractive entry point with a further case made by attractive dividend yields.
On Coronation Research BUY list are Zenith Bank; GTCO; Access Holdings; UBA; and Stanbic IBTC. On the HOLD list FBNH is featured.
Meanwhile, in 2023, Coronation Research expects three major themes to influence banks’ earnings performance.
1-Earnings diversification
After abandoning the universal banking structure in 2010, more banks have begun to diversify their revenue through the HoldCo structure given the tight regulations in the banking sector, macro headwinds and competition from fintechs.
The Holdco structure also gives them opportunities in other sectors such as pensions, fund management, the trustee business, the registrar business, venture capital, private equity, insurance and stockbroking.
Already five banks, including Stanbic IBTC, FBNH, FCMB (not covered in this report), Access and GTCO have begun operating as Holdcos while Sterling Bank (not covered in this report) has obtained approval in principle.
The early starters are already reporting benefits with the non-bank operations of Stanbic contributing 40.5% to its PBT; FCMB’s non-bank operations contributing 26% to its PBT; and FBNH’s non-bank operations contributing 9.8% to its PBT as at 9M 22. As a result of this we won’t be surprised to see more banks adopting the HoldCo structure in 2023.
- Geographical Diversification
The case for diversifying geographically is evident in the varying macro environment of each country. ETI and UBA have developed the most international franchises, operating out of 14 and 20 African countries, respectively. UBA’s non-Nigeria subsidiaries contributed 63% to the group’s Profit Before Tax (PBT) over the past three years.
GTCO’s non-Nigerian subsidiaries have also fared well, contributing 23% to the group’s PBT over the past three years. Access Holdings’ expansion drive has also been paying off with its non-Nigerian subsidiaries contributing 39% to the Group’s PBT over the past three years.
- Rates to remain elevated
We expect the CBN to maintain a hawkish stance for most of 2023 but expect lower rate hikes than last year as base effects are likely to keep inflation in check over the latter part of the year.
That said, we also expect an elevated level of government borrowing. On balance, we think these factors are set to translate to rising yields over the course of 2023 though at a gradual pace.
We believe the impact of rising yields will vary across the banks, depending on each bank’s ability to reprice its loan book and the composition and contribution of interest earning assets.
Given the sticky nature of loan yields, we favour banks with large exposure to investment securities in this regard. Lastly, we think banks with low-cost deposits are likely to benefit on a net basis.
Valuation remains compelling
Nigerian banks largely underperformed the broad equity market in 2022 returning only 2.8% in price terms vs 19.9% for the NGX All-Share Index. The market’s lack of enthusiasm stemmed from a combination of low earnings growth post-Covid and the inability of foreign investors readily to repatriate dividend and capital proceeds. Again, Nigerian banks currently trade at significant discounts to peers and offer an attractive entry point with a further case made by attractive dividend yields.
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