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As investors fold their arms waiting for banks to start reporting 2017 earnings this month, information reaching BusinessDay has it that the smaller lenders could show faster earnings growth than the big ones this year.
Analysts say the precipitous drop in yields on short term government securities in August means the end of free money for the big lenders; in other words, their earnings will not eclipse the small lenders’ in 2018.
“They were benefiting from high yields from treasury bills and now that those yields are coming down, their earnings growth will be smaller than that of the small and mid-sized bank,” said Bismarck Rewane, managing director and CEO of Financial Derivative Company Limited.
The stock price of some mid-sized bank has been on the rise since the start of the year, which means investors are optimistic of a return on their investment.
The share price of Unity Bank Plc has gained 247.17 percent since the start of the year, outperforming the Nigerian Stock Exchange All (NSE) Share Index (ASI) which has returned 14.03 percent.
Skye Bank Plc has gained (88 percent), Wema Bank Plc (+82.69 percent), First City Monument Bank Plc (+68.92 percent), Diamond Bank Plc (+52.0 percent), Fidelity Bank Plc (+23.58 percent), and Stanbic IBTC Holdings Plc (+13.25 percent).
“This year, in terms of growth, the small ones could outperform the big ones. This is because they are coming from a lower base and their profit will improve,” said Ayodeji Ebo, managing director and CEO of Afrivest Securities Limited.
“But that doesn’t take away the stiff competition where the tier 1 banks have dominated the space,” said Ebo.
Tier two lenders in Africa’s largest economy and largest oil producer are grappling with rising bad loans that are eating into capital buffers.
A lot of them have not recovered from the recession of 2016 that hindered customers from paying interest on loans borrowed.
“At least three small- to medium-sized banks will run into difficulties with their capital levels this year and will need to raise cash,” said Robert Omotunde, the head of investment research at Afrinvest West Africa Ltd.
The average baseline Capital Adequacy Ratios (CARs) for the industry, large, medium and small banks at end-June 2017 stood at 11.51, 13.13, -6.71 and 13.54 percent.
These represent a decline of 3.27, 2.34 and 19.46 percentage points for the industry.
While the introduction of a flexible exchange rate by the apex bank and the rebound in oil production and crude price helped the country exist its first recession in 25 years and ease the supply of dollars to banks, rising political risk before election and volatility in foreign exchange gains could cloud the outlook for the sector.
The demand for foreign currency could spike in the third quarter of the year when political activities will become charged, according to Kunle Ezun, research analyst at Eco Bank Limited
“Because Politicians need of money for campaigns, they will resort to buying dollars from the parallel markets,” said Ezun.
BALA AUGIE
