Banking Sector Update 2019

NIGERIAN BANKING SECTOR                                                                                                          

Tier I Banks remain the dominant force: Tier I banks under our coverage continue to outperform their Tier II counterparts in terms of profitability as measured by ROAE (Tier 1: 19.6% vs Tier 2: 11.3%) with notable outliers being FBNH (Tier I - FY’18: 10.5%) and STANBIC (Tier II - FY’18: 34.5%). In FY’19, we expect average ROAE to improve to 23.0% for Tier I banks and 12.8% for Tier II’s, driven by operational efficiencies and improved asset quality. Our outlook for FY’19 ROAA (2.6%) is however subdued for Tier I banks, dragged by the sudden increase in ACCESS’ balance sheet post-merger vs 1.9% for Tier II, supported by expected improvements in STANBIC and FIDELITY.                                

Non-interest income to drive earnings in 2019: Growth in alternative financial technology solutions (FinTech) has prompted banks to deliver essential financial services through cost-effective digital avenues, with mobile applications becoming genuine alternatives to traditional banking operations. We believe that Fees and Commission from banking transactions, especially digital banking, will account for a larger part of banks’ Revenues in FY’19, with relatively low implementation costs involved in delivering services on a larger scale.                                                  

Mild optimism thanks to growth recovery: The fragile macroeconomic environment, general risk aversion (to maintain asset quality) and still attractive government bonds yields all combine to explain our modest outlook to loan growth y/y, as banks tend to ride on the macro picture. On a relative basis, Nigerian banks quoted on the Nigerian stock exchange have seen a gradual improvement in P/B multiples, coming from an average of 0.5x in FY’16 and 0.6x in FY’17 to 0.8x in FY’18. However, the sector is currently trading at a 57% discount to MSCI EM banks (1.9x).