H2’23 SSA Banking Outlook – Policy reforms to mark the turn of the tide

What shaped the past week?

Global: Global markets recovered this week, with U.S. inflation and quarterly earnings coming into focus. A lower June inflation (3.0% y/y) print, drove investor optimism in U.S. markets. We also got remarks from ECB this week, suggesting that interest rates are approaching their terminal rate. With inflation easing in the U.S., investors are optimistic that the Federal Reserve will hold rates steady at their June meeting. Overall global investors remain optimistic that tightening conditions are breaking their peak. Furthermore, with Q2’23 earnings-season underway, major U.S. banks announced earnings on Friday. BlackRock and JPMorgan saw revenue, EPS and profit-after-tax all come in better than analyst expectations. On the macro front, the global economy appears to be slowing, with manufacturing activity contracting in New Zealand, and Chinese exports contracting as well. Furthermore, Australia announced that RBA deputy governor, Michele Bullock would become that new RBA chief. Finally, industrial production fell in Japan, contracting by 2.2% m/m. In the coming week, investors will digest the latest earnings results across global markets, with an eye on the Fed’s July policy meeting.

Domestic Economy: Nigeria crude earnings rose Nto 1.68 trillion on the year, following an improvement in output in June. According to the production report from the Nigeria Upstream Petroleum Regulatory Commission, the country’s daily oil output rose to 1,248,960 barrels in June. The new report highlighted that total crude oil output in June was 37,468,798 barrels. In May, the country’s earnings from oil stood at ₦1.28 trillion, however, the slide of the naira against the dollar, higher oil prices and improved output drove the improved revenue observed in June.

Equities: As expected, local investors took profit this week following last week’s rally. The market posted a marginal loss of 0.75% w/w. The red close was driven by Banking space, which was the best performer last week. The performance of the Industrial Goods sector cushioned some of the market’s losses, as a share buyback by Dangote Cement, drove investor optimism in the counter. The Oil and Gas space closed in the green, due to investor confidence in the oil marketing space. Finally, it was a red close for the Consumer Goods sector, as broad-based losses dragged its performance.

Fixed Income: It was a mixed week of trading in the secondary market. Investors reacted favorably to the NTB auction outcome, where stop rates offered continue to trend downwards. We saw a rise in NTB prices across the curve, due to investors pursuing T-bills driven by ample liquidity levels and lower stop rates. Conversely, we saw pockets of profit-taking action in the bonds space, as most investors remain on the sidelines with their focus on the July bond auction. Prices at the short-end of the curve closed lower w/w, however we did see prices rise w/w on some tenors at the long-end of the curve.

What will shape markets in the coming week?

Equity market: We cannot rule out the possibility of a recovery in the market this week, particularly due to the steep losses recorded in the banking space this week. Furthermore, with Q2’23 earnings season coming into focus, this too should drive sentiment in the space this week

Fixed Income: We anticipate a mixed session in the market to start the week. While liquidity remains strong at N440 billion, it has dropped from the higher levels we have seen in recent times; furthermore, focus will now shift to the MPC meeting for July, and how the CBN responds to inflationary pressures.

H2’23 SSA Banking Outlook  – Policy reforms to mark the turn of the tide       

Nigerian Banks: Policy reforms to mark the turn of the tide

In 2022, the banking industry came under significant pressure due to a myriad of factors which stifled the growth of the sector. Despite being a year characterized by higher yields, Tier-I banks, on average, recorded weak growth of 0.7% in their bottom-line, owing to factors such as increasing operating costs and impairments from Ghana’s debt restructuring. Gross earnings recorded strong growth across Tier-I banks, with an average growth of 25.6% y/y, which was buoyed by an increase in interest income. However, the growth in gross earnings did not lead to a significant growth for Tier-I banks, as these banks suffered losses arising from impairments on Ghana debt securities. Particularly, ACCESSCORP, ZENITHBANK, GTCO, UBA and FBNH reported losses from impairments on Ghana securities to the tune of ₦103 billion, ₦59 billion, ₦35.6 billion, ₦17.3 billion and ₦5.9 billion respectively.

As of Q1’23, Gross earnings were up by an average of 43% y/y, while Net Profit grew by an average of 36% y/y. The remarkable growth in earnings came as a direct consequence of the monetary authority’s efforts to keep interest rates elevated in a bid to stem inflationary pressures. This drove asset yield higher across loans and advances and in some cases, Fixed Income (FI) securities, but also affected the cost of funds (CoF). So far, the overall performance of banks on the NGX has been impressive, spurred by the policies which the new administration has implemented.

We expect rates to remain elevated for the rest of the year, leading to higher earnings from core-banking across board. However, this will be somewhat offset by the increased CoF, as banks will have to pay a higher fee on deposits, while borrowing costs will also remain elevated throughout the year, as inflation remains sticky due to the removal of fuel subsidy.

Notably, policy reforms such as subsidy removal and unification of multiple foreign exchange rate windows by the new administration have spurred the positive performance of the market. Our analysis reveals that Tier-1 banks are set to belly significant revaluation gains owing to their net foreign currency (FCY) assets position. These revaluation gains would boost their bottom lines and could offset the decline in capital adequacy ratios due to exposure to FCY-based assets. Also, the removal of subsidy and adoption of a unified FX regime brighten the outlook on the creditworthiness of the Nigerian government’s fiscal position. Hence, given Nigerian banks are significantly exposed to the country’s sovereign bonds, we expect this to reflect positively on the ratings of these banks.

Naira devaluation to drive earnings expansion.

A critical look at the assets and liabilities in foreign currency (FCY) of our coverage banks reveals that only STANBIC has a net foreign-currency liability, which could impact the profitability of the bank negatively. On the flip side, FBNH, ZENITHBANK, UBA and GTCO are positioned to record impressive growth in earnings based on their net foreign-currency assets. Our sensitivity analysis of which the base case is N700/$ projects that these banks’ earnings will likely grow by N82 billion, N453 billion, N50 billion, N24 billion, N129 billion, N189 billion and N398 billion respectively.

Loan book growth strengthened on the back of devaluation of Naira.

In 2022, our coverage loan book grew by 20% y/y. Despite the continuous rise in rates, banks have continued to see increases in loans and advances, with the government being a key driver for this. In 2023, we project a 25% y/y growth in loans and advances for our coverage banks, mainly driven by the devaluation of the naira as our coverage banks hold a significant portion of their loans in foreign currency. Hence, we project that our courage banks’ loan books will grow by N970 billion, N992 billion, N261 billion, N369 billion, N561 billion, N212 billion, N1.03 trillion, and ₦783 billion for ACCESS, FBNH, FCMB, FIDELITY, GTCO, STANBIC, UBA, and ZENITHBANK respectively based on Naira devaluation.