What shaped the past week?
Global: Stock exchanges in the Asia-Pacific region traded mixed throughout the week as investors awaited the Bank of Japan’s interest rate decision. Major indexes fluctuated amid corporate earnings announcements, with carmakers Hyundai and Nissan, and Samsung posting quarterly results. In China, strong gains followed a Politburo meeting focused on economic strengthening. Attention remained on global central banks’ monetary policy decisions, particularly the US Federal Reserve’s 25bps rate hike. However, Japan’s Nikkei 225 slumped after the Bank of Japan’s decision to hold interest rates while adjusting its yield curve control policy. The week ended with major stock equities in the Asia-Pacific region showing mixed results.
Major European markets had a mixed week with fluctuations in gains and losses. Early in the week, manufacturing and services reports influenced market performance. Investors closely monitored central banks’ monetary policy decisions, affecting trading sentiment. The European Central Bank’s rate hikes led to significant gains. Later in the week, improved consumer confidence and inflation slowdown in Germany and France contributed to higher closes. Major companies’ quarterly updates were also in focus during the period.
Domestic Economy: The Monetary Policy Committee (MPC) gave its first policy direction under the chairmanship of Mr. Folashodun Shonubi, the Acting Governor of the Central Bank of Nigeria (CBN). The Committee remained hawkish, raising two key rates – the Monetary Policy Rate (MPR) and the Standard Deposit Facility (SDF) rate. While 6 members voted in favour of a rate hike, 5 members voted to hold rates constant. Faced with two decisions; to hike or to hold, the Committee leaned towards a moderate rate hike to anchor inflation expectations, narrow the negative real interest rate gap, and improve investor confidence. Eventually, the Monetary Policy Rate was raised by 25 basis points to 18.75%. In addition, the Standard Deposit Facility (SDF) rate was adjusted to -300bps around the MPR (from -700bps around the MPR). While we recognize the measures of the apex bank to absorb banking system liquidity by making deposit facility more attractive, we understand that interest is not paid on deposits exceeding ₦2 billion based on an existing CBN circular. Thus, further clarity on deposit limits is needed to assess the effectiveness of this policy in tackling system liquidity.
Equities: The local equities market experienced a tepid week of trading, with investors displaying mixed sentiments. Among the major four sectors, three closed in the red, while the Oil and Gas sector emerged as the sole gainer. The negative investor reaction to some earnings reports can be attributed to significant foreign exchange rate losses, primarily due to a weaker naira. Notably, the Consumer Goods space incurred a loss of 2.36% w/w, with GUNINESS shedding 10.00% w/w. Additionally, the banking sector lost 2.21%, and the Industrial Goods space recorded a moderate 0.31% loss.
Fixed Income: The secondary market experienced a bearish week of trading as investors reacted to the latest NTB stop auction rates. The Central Bank of Nigeria (CBN) raised stop rates with the aim of attracting foreign investors by the prospects of a higher risk premium, leading to widespread selling activity across the space. Notably, the yield on the 1-Year note surged to 9.00%. In the bonds space, despite strong liquidity levels, the market traded bearishly as investors took profit in anticipation of higher rates at the next bond auction. Yields rose primarily at the long end, with the 10-Year note increasing by 38bps to settle at 14.00%.
What will shape markets in the coming week?
Equity market: Listed companies, especially in the consumer goods and oil & gas sectors had FX loss wipe out or reduce their profit for the period. With similar results expected from the remaining companies in the real sector, we expect a bearish start to the week.
Fixed Income: Despite strong liquidity levels, we saw investors sell off tenors today. The guidance on stop rates trajectory suggests that we should see a broad rise in rates offered at both the NTB and Bond auctions in the coming weeks. That said, we expect to see further sell-side pressure in the fixed income market to start the week.
FBN HOLDINGS PLC H1’23 Earnings Release – FX revaluation gains drive earnings expansion
FBNH recently released its H1’23 results, reporting an 83% y/y jump in Gross earnings to N656.4 billion, 31% above our N502.1 billion estimate. The earnings beat was as a result of a 69% y/y rise in Interest Income to N383.3 billion, driven by a 53% y/y rise in income from loans and advances, which came in at N255 billion. Furthermore, the bank saw a 128% y/y rise in interest earned on investment securities, which totaled N110.9 billion, reflecting the stronger asset yields seen this year. Meanwhile, Net Interest Income was 55% higher y/y at ₦237.3 billion, despite a 99% increase in Interest Expense to N145.9 billion. On the other hand, the bank’s Non-Interest Revenue (NIR) recorded a strong growth of 114% y/y to ₦257.9 billion, owing to fair value gains from financial instruments to the tune of N229.7 billion. Specifically, the bank confirmed to us that the fair value gains were as result of naira devaluation.
Cost-wise, impairments on loan losses rose by 165% y/y to N57.6 billion on the back of revaluation of loans and advances in FCY, which resulted in an increase in loan book by 39% Ytd. Meanwhile, Operating expenses grew 25% y/y to N231.6 billion amid an 18% increase in regulatory charges. The bank’s cost-to-income ratio moderated significantly to 46.8% (H1’22: 68.0%) due to the bank’s revenue increasing much faster than its expenses. Overall, the bank’s PBT came in at N206.3 billion (+214% y/y), while PAT was 230% higher y/y at ₦187.2 billion.
FY’23 profit projection strengthened on Q2 beats
FBNH’s Q2 performance was very impressive, as Q2 profits rose 460% y/y amid higher NIR (+232% y/y). Similarly, Opex was up 28% y/y, due to a surge in regulatory cost and other operating expenses by 33% and 30% y/y respectively. Therefore, we have adjusted our FY’23 projections to account for Q2 performance.
Firstly, we increased our Interest Income projection to N811.3 billion (Previous: N694.7 billion) based on a significant increase in the bank’s loan book and CBN’s reduction of CRR to 10% from 32.5% for merchant banks which would boost the interest income of the bank’s merchant banking segment. Our Interest Expense line has also been adjusted to ₦300.8 billion from N237.4 billion based on a full-year cost of funds estimate of 2.4%, following a significant rise in customer deposits of N10.5 trillion (Previous: ₦9 trillion).
On the expense side, our Opex estimate (₦405.6 billion) for FY’23 remains unchanged, while our impairments estimate has been raised to ₦114 billion due to a significant rise in loan book, with a cost of risk of 2.2% on the new loan book estimate of ₦6.2 trillion.
TP revised to N26.00 (Previous: N22.00)
Our revised earnings forecast yields a PAT figure of ₦363.2 billion (Previous: ₦167.6 billion) and an ROAE of 34.9% (Previous: 16.1%). This, along with an EPS of ₦10.02 (Previous: N4.62) and a final dividend projection of ₦1.20/share (Previous: N0.70), gives a revised 12-month Target Price (TP) of ₦26.00 (Previous: N22.00). Therefore, we maintain our BUY rating on the stock. FBNH is currently trading at ₦19.85, 31% below our TP.
