9M’23 Banking Earnings Preview

What shaped the past week?

Global: Global markets traded in a positive manner w/w, following weeks of sell-side due to rising global uncertainties. This week, we saw rising geopolitical tensions put upward pressure on haven assets such as gold; Israel’s aggressive military campaign in the Gaza strip has heightened risk-off sentiment across risk-on markets.

Starting in the U.S., Microsoft’s acquisition of Activision Blizzard Inc, makers of the popular game Call of Duty, was finally approved after a two-year tussle with regulators over the acquisition. On the other hand, treasury yields continue to climb, owing to the government’s expansive borrowing plans, continues to flood the US fixed income market with bonds.

For Europe, investors paid close attention to statements from European Central Bank President Christine Lagarde. When speaking to the press, President Lagarde expressed her optimism that inflation will fall to the ECB’s 2% target range; we note that we have seen disinflation in the Eurozone, reflecting the impact of higher interest rates in the region. However, President Lagarde noted that the apex bank is “ready to do more if necessary” if there is a resurgence in inflationary pressures.

Finally, in the Asian – Pacific region, investors reacted negatively to industrial action in Australia, after workers at Chevron’s LNG platform, announced that they will go on strike next Thursday. This comes three weeks after unionized workers and the energy giant, agreed to end gas strikes. Meanwhile for China, there was a lukewarm reaction to the latest batch of economic for the country. Consumer prices were flat y/y, recording a m/m rise of 0.2%; this has intensified deflation-risk concerns for the economy, and this drove the tepid w/w performance of Chinese stocks. 

Domestic Economy: In accordance with a circular issued on October 13, 2023, the Central Bank has eased restrictions on 43 items that were previously prohibited from accessing foreign exchange (FX) through the official channel. This action is part of the Central Bank’s efforts to establish a unified FX market. Additionally, the central bank has expressed its intention to enhance FX liquidity through seasonal interventions in the Foreign Exchange Market.

While this measure has the potential to improve price discovery in the official market in the medium to long term, it is important to note that its impact on the exchange rate in the short term may be neutral. This neutrality is expected to persist until there is a substantial increase in oil production and greater clarity regarding the Petroleum Motor Spirit (PMS) subsidy regime. The National Upstream Petroleum Regulatory Commission (NURPC) reported that oil production increased to 1.57 million barrels per day in September. Despite the rising landing cost of PMS, PMS prices have remained relatively sticky upwards.

In the near to medium term, several essential steps, such as settling the $6 billion FX forward contracts, increasing oil production to the range of 1.7 to 1.9 million barrels per day, implementing automatic price stabilizers to minimize PMS subsidies, and repaying outstanding Ways and Means Balances, are crucial in alleviating the pressures on the Naira.

Equities: The local bourse sustained it’s bullish run this week, expanding by 1.12% WoW, closing in the green in four of five trading days, driven majorly by sustained buy-interest in BUACEMENTS (+12.55%), NB (+9.09%), DANGSUGAR (+7.43%), NASCON (+5.77%). Meanwhile, it was a bullish week for our sectors: Industrials, Consumer Goods, Oil & Gas saw gains of 5.03%, 1.39%, and 0.33% respectively, while the Banking sector declined by 0.78%.

Fixed Income:   In the fixed income market, trading remained relatively subdued in the bonds space week as investors closely monitored developments while buy-interest was seen in the NTB space owing to elevated liquidity levels. The primary reason for the lack of activity has been the lack of policy direction by the new CBN administration. Investors are keen to understand the policy direction of the new CBN leadership and their strategies for tackling rising inflation.

What will shape markets in the coming week?

Equity market: We look forward to similar mixed trading sessions next week, as most investors remain on the sidelines, while banking counters continue to dominate activity chart.

Fixed Income: Looking ahead, we expect investors’ attention to be skewed towards the bond auction slated to be held on the first trading day of next week; hence, muted trading activity is projected to dominate the secondary market for bonds, while liquidity levels will determine the direction of the NTB market.

9M’23 Banking Earnings Preview

In the first half of the year, banks under our coverage reported earnings improvements. Interest Income improved as a result of strong growth in loan book amid elevated interest rates. The strong growth in loan book was majorly due to the translation of the Foreign Currency (FCY) components of banks’ loans, with loan book for our coverage bank expanding in H1 to ₦30 trillion, 32% higher than the FY’22 figure. In absolute terms, the biggest contribution to the improvement in loan book was from ACCESSCORP, followed by FBNH and UBA. Also, customer deposits rose significantly primarily due to the translation of FCY components of customer deposits, thereby pressuring Interest Expenses. Customer deposits rose to ₦58 trillion, 33% higher than the figure reported in FY’22, with ACCESSCORP, UBA and ZENITHBANK recording the largest increases. Subsequently, Net Interest Margins (NIMs) rose y/y for most of our coverage banks (FIDELITYBK, ZENITHBANK, UBA, FBNH) and declined for some banks (ACCESSCORP, FCMB, STANBIC) as the growth in asset yields surpassed the corresponding increase in funding costs in Q2, while the reverse occurred for banks with slimer NIMs.

The expansion in NIMs of some of our coverage banks is on the back of higher Current Account and Saving Account (CASA) mix after the translation of the FCY component of customer deposits and vice versa. Notably, the banks reported material FX revaluation gains which boosted Non-Interest Revenue performance. Moreover, after netting out FX-related losses from liabilities, FX revaluations gains were still positive for all our coverage banks, with GTCO, ZENITHBANK and UBA recording the largest gains to the tune of ₦355 billion, ₦354 billion, and ₦348 billion respectively. On the other hand, our coverage banks cost of risk worsened by 39bps y/y, reflecting the heightened risk environment exacerbated by the policy reforms.

For Q3, we anticipate improved earnings growth, with interest income on loans and advances to remain the biggest contributor in terms of growth in topline, while Opex is projected to rise significantly, as NIR remain stable after stripping out FX revaluation gains. Hence, Net Interest Income is predicted to be the major driver for bottom-line growth due to the expected rise in Interest Expense caused by the increase in customer deposits. Banks with higher CASA mix are expected to report better NIM, as current and savings accounts constitute a larger portion of their customer deposits base, which typically bear a lower cost of funds amid elevated interest rates. Hence, banks with higher NIMs are projected to benefit more from the translation of the FCY component of both their loan books and customer deposits.

For NIR, we expect growth to remain slow, as fees and commissions growth remains steady, while trading and revaluation gains continue to be the determining factor for growth in the bank’s NIR. That said, on the back of elevated liquidity levels and cautious trading by market players, we anticipate some reversals in trading losses.   

On the cost front, we expect impairments to grow at a slower pace as most of the provisions for loan losses have been made in H1, while we expect profitability to be strongly impacted by improved NIMs, slow NIR growth and increased costs; mainly driven by higher banking regulatory (AMCON) costs and inflationary pressures on staff and energy costs.