Nigeria Banking Sector - Q3'19 Earnings Preview

Q3'19 Earnings Preview                                                       

For Q3'19, our coverage banks remain poised to improve on their H1'19 operating performance, given our expectations for mild improvement in the operating environment during the 3-month period. Treasury yields (T-bills and Bonds) inched up by approximately 200bps in August and September after dipping to a 9-month low in July. As such, we estimate a 75bps upside to Net interest margins for our coverage banks during the 3-month period from improved asset yield. We also estimate an industry-wide loan growth of 8% q/q driven by the CBNs 60% LDR floor. These developments, along with trickles of improved spending q/q, drive our expectations for improved topline earnings (Interest Income and Non-interest Income).                

As we earlier highlighted in our Banking Sector update, DMBs will give pre-eminence to preserving asset quality over credit expansion, in view of the elevated NPLs within the sector (H1’19: 9.3%, Q1’19: 10.8%, FY’18: 11.7%); hence, we were not surprised when media reports revealed that five of our coverage banks had been debited in excess of ₦351 billion in additional CRR for non-compliance with the 60% minimum or insufficient exposure to priority sectors (Mortgages, SMEs and Retail). Consequently, we expect a slightly elevated Q3'19 cost of risk for our coverage banks ex ACCESS.                                                      

In summary, we project mild improvements in our coverage ROAE (from 20.4% to 22.2%), Cost-to-income (from 56.5% to 56.0%) and NPL ratios (from 7.7% to 6.7%) in Q3'19. On a relative basis, Nigerian banks are trading at a P/B of 0.8x, a 51% discount to MSCI EM banks. Also, our outlook for improved macros in 2020 re-emphasizes our view that Nigerian Banking counters are very attractive at current levels.