During Renaissance Capital’s 9th Annual Pan-Africa 1:1 Investor Conference in Lagos on 16-18 May, we met with nine banks. It is evident that the Nigerian banking sector is slowly returning to stability on the back of improving macro indicators, but asset quality issues and the declining yield environment remain a challenge.
Despite a positive macro backdrop, we believe 2018 is a recovery story at best; in addition to a declining yield environment, we expect earnings growth will be challenged, with volatility in FX-related gains and limited scope for cost efficiencies. Tough economic decisions are likely to be delayed until after the 2019 general elections, but the political risks that come with a pre-election year render us cautious on the recovery ahead (“Nigerian banks: The path to recovery”; Feb 5, 2018). Feb 5, 2018)
Many of the banks appear to have similar views as to how to navigate 2018 – no single bank stands out to us as adopting a differentiated approach in dealing with the potential short-term challenges that could constrain earnings growth.
We see scope for monetary easing and a 2-ppt cut in the policy rate to 12% by the end of 2018. Loan growth of 10% remains the banks’ consensus guidance for the year, with none expecting significant capital projects to get underway. Instead, they expect loan growth from financing working capital requirements for international oil companies (IOCs), manufacturing and trade finance customers. On noninterest revenue (NIR), the banks noted that volumes and spreads on swap contracts have narrowed. Revaluation gains will continue to feature; NIFEX (currently NGN340/$ vs NGN330/$ at YE17) has become the accepted rate for converting FX-denominated balance sheets and is slowly converging towards the investors’ and exporters’ (I&E) rate of NGN360/$.
We highlight other key take-aways from the conference below:
Politics: We do not believe politics is a key risk for the banks in 2018. The banks also mentioned that they will adopt a cautious approach towards lending.
Regulation: The banks bemoaned the fact that the effective cash reserve requirement remains above 30%, and they do not see the Central Bank of Nigeria (CBN) lowering this for fear of undermining the FX rate.
Deposit growth: There has been no recovery in deposit growth across the sector; we had expected a decline in T-bill yields to be positive for deposit growth as the pressure on deposits in 2017 was partly the result of customers chasing higher yields on government securities. However, according to the banks, our expectations have not quite played out. We now see no strong drivers for deposit growth in the short term.
Capital: The implementation of Basel 3, scheduled to take effect by end-2018, is likely to be delayed. According to the banks, the CBN’s focus has been on the implementation of IFRS 9, and that is likely to take priority this year. For most banks, the impact of IFRS 9 has been fully accounted for in their 1Q18 results.
Costs: In our view, the Nigerian banks are doing little in terms of cost management. A few banks cited the possibility of closing branches, pending approval from the CBN.
We believe the overall operating environment still favours the big banks, but the small banks should enjoy some respite from asset quality issues in an improving macro environment. Our top picks are GTBank and UBA.
Olamipo Ogunsanya
Ogunsanya is Sub-Saharan Africa Banking Analyst, Renaissance Capital
