Earning, geographical spread, rates to shape banks’ 2023 performance

• Analysts say it’s a year of resilience‭, ‬grit for‭  ‬positive earnings

Analysts across the Nigerian financial markets, continuing to digest the banking sector’s 2022 earnings releases so far, have quickly turned their gaze to 2023 when they see the sector relying on resilience and grit to ride out pressures from stringent regulations, high inflation, continuous dollar shortages as well as asset quality issues.

A banking sector research report by Coronation Asset Management says the sector’s resilience and grit expected to be shown in 2023 will see banks’ earnings performance being shaped by earnings and geographical spread, as well as the rates’ play of the Central Bank of Nigeria (CBN) in the course of the year. 

“In 2023 we expect the Nigerian banking industry to face pressures,” the Coronation analysts said in their report, but added that, notwithstanding these pressures, they “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.” 

Already in the second quarter of the year, the report, taking a deep dive into potential banks’ earnings performance for the current year, the analysts identified earnings diversification, geographical diversification and an expected rate elevation as expected drivers and the themes upon which banks’ earnings performance would be influenced in 2023.    

According to the Coronation analysts’ report, since abandoning universal banking structure in 2010, more banks have been diversifying their revenue through a HoldCo structure, amid 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,” states the report.

It noted that five banks, including Stanbic IBTC, FBNHoldings, First City Monument Bank (FCMB), Access Corporation and GTCO have begun operating as Holdcos, with Sterling Bank obtaining approval in principle to join this category of banks.

The analysts demonstrate how this would influence the banks’ performance in 2023 by stating that, “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.”

The inroad that Nigerian banks have made in other countries, especially across the African continent, is seen as a plus, one that will also aid the concerned banks’ earnings this year, according to the report.

It noted that the case for diversifying geographically is evident in the varying macro environment of each country, stressing that 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,” the report stated to support the position that geographical diversification would aid banks’ earnings performance this year, especially given the varying macro environment of each of the countries in which they have operations.

On how rates will shape performance in the sector this year, the Coronation analysts in their report are of the view that rates remain elevated, as they went on to posit that the Central Bank of Nigeria (CBN) will take a hawkish position for most of the year, but that the apex bank’s hikes would be lower compared to how they moved rates in 2022.

“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,” the analysts wrote.

With their position on rates, the report stated that they expect an elevated level of government borrowing, noting: “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,” the Coronation analysts asserted.

Providing coverage for six banking institutions, namely, Access Corporation, FBNHoldings, Guaranty Trust Holdings (GTCO), Stanbic IBTC, UBA Group and Zenith Bank, to drive in the analysts projections for the banking industry performance outlook for 2023, the report followed with a deep dive   

Access Corporation’s ambitious growth plans are seen as already paying off following the close of its 5-year corporate strategy that ran from 2018–2022. The HoldCo, which has already established a strong franchise outside of Nigeria with 12 subsidiaries throughout Africa, has seen these contributing 22 percent to the group’s profit before tax (PBT) in the nine months of 2022 compared to 16 percent in the full year of 2017.

Projecting into 2023 for Access Corporation, the analysts wrote: “The group has new ambitions for the period 2023–2028, namely to further expand and solidify its presence outside of Nigeria, leveraging its Holdco to diversify revenues in the areas of consumer lending, payments, insurance, asset management and pension fund management.

“We believe this diversification is set to improve earnings, particularly from its consumer lending and its pensions business, in which it aspires to attain a top-10 position by 2023 (currently #12),” they stated.

Higher growth is seen for FBNHoldings on the back of what the analysts described as “improved asset quality.”

Specifically, the Coronation Asset Management banking sector report stated that the rise in the yield environment over the year is likely to be accretive to its net interest margin (NIM) expansion, in view of FBNHoldings’ low-cost deposit profile.

“We expect support from its international subsidiaries and non-bank subsidiaries. We expect a 10bps y/y expansion in its NIM during FY 2023F driven by growth in asset yields. Elsewhere, we expect strong performance in the bank’s digital banking business and its wealth management subsidiaries also to support earnings over the year,” the analyst wrote. 

Providing details on Guaranty Trust Holdings (GTCO) to buttress their outlook forecasts for the banking sector, the analysts said it represents “a choice in a tight corner”, noting that while return on average equity appears to have peaked, a degree of change in this trend is seen going forward, especially in the wake of its management’s adoption of the HoldCo structure.

“We believe its payments subsidiaries (Habaripay) and its PFA are set to enable the HoldCo to diversify earnings and multiply cross-selling opportunities. Our forecasts for GTCO assume low impairment charges and adequate cost control,” the analysts wrote.

As one of the first banks to adopt the HoldCo structure in its operations, the report said Stanbic IBTC now runs well-established corporate banking and asset management businesses with its retail banking segment growing rapidly. The analysts see its 2023 earnings outlook tilting towards an upside.

The analysts at Coronation said: “We expect to see improved trading gains in 2023F due to elevated fixed income trading activities and FX spreads. We anticipate an expansion in NIMs owing to strong credit growth and an elevated rate environment.

“Overall, we like Stanbic IBTC’s diversified business model and its recent announcement of a fintech subsidiary. We expect management to take advantage of cross-selling opportunities among its business segments,” said the analysts.

Deep diving into UBA Group, Africa’s global bank, the analysts project that its earnings will weather any storm this year.

According to them, “We expect NIMs [net interest margins] to remain steady due to management’s ability to reprice rates on its loan book quickly. Overall, we believe that strong gains in interest income and fees are likely to counteract worries over its asset quality over time.”

For Zenith Bank, described in the report as “a compelling value proposition”, and which has effectively played the traditional banking approach until now, there is a look out for how its management intends to leverage its planned HoldCo structure, for which it has already received approval-in-principle from the CBN.

The analysts write that “the bank has been able to effectively source low-cost deposits from its growing retail business and deploy the same to its corporate segment. We expect this, together with its growing earning asset base, to preserve NIMs.”