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Nigerian Banks: Weathering the market storm

February 2, 2023337 views0 comments

What shaped the past week?

 

Global:  Investors reacted positively to the latest U.S. inflation data, where prices rose 6.5% y/y (Previous: 7.1% y/y). Optimism across markets was driven by speculation that inflation has peaked across key economies, and market participants should expect to see a continued slowdown in inflation.

In Asia, investor sentiment was further boosted by the latest trade data from China. The nation’s trade surplus increased to $78 billion, surpassing market expectations of $76.2 billion. Meanwhile, the Shanghai Composite rose 1.19% w/w, while the Nikkei rose 0.59%.

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In Europe, investors reacted to the latest batch of economic data. Industrial production in Germany rose 0.4% y/y, while investor confidence in the Eurozone improved m/m. However, statements from ECB officials noted that the growth outlook remains weak, while interest rates would have to rise significantly to ease inflationary pressures. For the week, the German DAX, French CAC, and London FTSE-100 rose 3.45%, 2.35%, and 1.56% respectively.

Finally, in the U.S., investors largely took positions in the equity market ahead of the U.S. inflation data release, as earnings season comes into focus. Following the release of the data and statements from U.S. Fed officials, optimism grew over speculations of a smaller 25bps rate hike from the U.S Fed in February. The NASDAQ, DJIA, and S&P500 were up 3.80%, 1.69% and 2.30% w/w respectively as at time of writing.

 

 

Domestic Economy:    According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), crude oil production (excluding condensates) reached a 9-month high of 1.23 million bpd in December 2022. This represents a 4.2% m/m increase over November 2022 output, but it still falls short of OPEC’s 1.8 million bpd allocation. The increase in output in December was primarily due to an increase in oil production across the key terminals. Because of Tompolo’s warfare on oil theft, oil output has been steadily increasing over the last three months. Although Nigeria missed out on big gains when oil prices were above $100 per barrel, continued output growth could boost crude export earnings (the country’s main source of foreign exchange), and relieve pressure on the Naira.

 

Equities:   Nigerian equities rebounded this week, as broad-based interest across the NGX propelled the market higher. The benchmark NGX rose 2.52%, with all major sector indices closing in the green w/w. With earnings seasons approaching, we saw investors continue to take positions across the market, notably in the Banking Space. The sector ended the week as the best performer, rising 3.48% w/w, with the likes of ZENITHBANK, ACCESSCORP, and UBA rising 4.50%, 3.33%, and 4.38% w/w respectively.

Likewise, in the Industrial Goods space, optimism in the cement makers drove the sector higher, with WAPCO, BUA CEMENT, and DANCEM rising, 5.42%, 3.59%, and 3.05% w/w respectively, contributing to a 3.34% w/w gain for the sector.

Moving to the Consumer Goods space, DANGSUGAR was the primary driver of gains recorded by the sector, as it rose 7.50% w/w, and the sector gained 0.68% w/w. Finally, investors remained bullish on players in the oil marketing space, with ARDOVA and TOTAL rising 6.11% and 10.00% w/w respectively; with the Oil and Gas sector rising 3.19% w/w.

 

Fixed Income:   This week’s secondary market was dominated by bearish sentiments. Starting with the bond market, sell-side sentiment across the benchmark curve drove the average yield up 19 basis points w/w. Similarly, NTB selloffs increased the average yield by 16bps w/w. Finally, given muted activities in the OMO space, yields remained unchanged w/w

 

Currency: The Naira depreciated ₦0.20 w/w at the I&E FX Window to ₦461.90.

What will shape markets in the coming week?

Equity market:   The positive sentiment this week was seen across board, as all sectoral indices except the insurance closed in the red. Also, the week returned 252bps compared to the 6bps loss in previous week, and we are likely to see moderations next week, as investors begin to take profit.

 

Fixed Income:    Next week, we expect the NTB market to trade in line with system liquidity, while the bonds market should trade on a quiet note ahead of the release of the Q1 bond issuance calendar.

 

 

Nigerian Banks: Weathering the market storm

 

In 2022, we have seen the delineation between the financial performances of the banks and the performance of their respective stocks. The bearish sentiment — reflected in the banking sector’s 8.35% YTD loss as at time of writing, outdone only by the Insurance sector (-22.35% YTD) — lies in complete contrast with the financial performance of the banks.

 

So far, the overall performance of the banks on the NGX has been impressive, regardless of negative market sentiment. As of 9M’22, Gross earnings were up by an average of 23% y/y, while Net Profit grew by an average of 20% y/y.  However, one small caveat is that, despite the impressive nominal growth in profits, net profit margin is down to 16% from 17% in 9M’21. This was mostly caused by an increase in regulatory cost, specifically AMCON charges, which drove Opex higher across board, while impairments have been fairly tame for majority of the year.

 

The remarkable growth in earnings came as a direct consequence of the sharp rise in interest rates, itself caused by the spike in inflation which forced the Central Bank Monetary Policy Committee (MPC) to raise the Monetary Policy Rate (MPR) in two consecutive meetings in late Q2 and early Q3. This drove asset yield higher across loans and advances and in some cases, Fixed Income (FI) securities, but also had an effect on cost of funds (CoF), as the minimum savings rate increased from 10% of MPR to 30%. However, this change in savings rate came at a later time in Q3 and has not yet been fully reflected in the banks’ interest expense lines.

 

In 2023, we expect rates to remain elevated for the majority of the year, leading to higher earnings from core-banking across board. However, this will be 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 a worry.

 

On the other hand, the CBN’s policy on the local currency could cause a spike in deposits, although this would likely be temporary. However, there is a high chance that the cash deposited ahead of the new notes being reissued could linger in the banking system, depending on the availability and ease of access to the new notes. Thus, we expect Q4’22 and Q1’23 deposits to spike, before levelling off in the outer periods of 2023.

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