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Nigeria Banking Sector - FY'16 Earnings Preview

Mixed outlook - asset quality to pressure earnings

• The tough operating environment has come in hard on the banking sector with most of the banking names coming under immense pressure. The weak oil prices and overall economic slowdown has resulted in heightened risk environment as default continues to brew. Earnings across our coverage have come in mixed with the top tier names reporting modestly impressive performances – largely due to better asset quality, whilst the lower tier names have struggled to navigate the tough headwinds.
• Looking through the 9M’16 earnings, we highlight that the pressure points remain similar across all banks. Interest Income has particularly been sticky (up 2% on average) as real loan growth took a breather. Whilst non-interest income was weak in Q1’16, the income line recorded a significant boost in Q2’16 following the currency devaluation as banks recorded strong revaluation gains.
• The chief stress point however remains rising NPLs. With the banking sector NPL ratio consistently creeping higher (H1’16:11.7% vs. FY’15: 5.3%), we have seen loan loss expense rise by over 150% across our coverage banks – FBNH accounting for a significant chunk. In line with historic trend, we expect even higher provisioning in Q4’16. Hence, we estimate additional ₦135 billion provisioning across our coverage in Q4’16 – accounting for 34% of full year provision.
• Whilst we anticipate capped earnings growth in Q4’16 (as Non-Interest Income moderates amidst a relatively stable exchange rate), we expect top line for FY’16 to remain strong across our coverage – supported by the impressive earlier run rate. Consequently, we estimate an average 14% y/y rise in FY’16 Gross Earnings.
• Overall, we expect mixed performances across the banking names. A few of the tier I banks are on track to report record high profits – a strong prospect for impressive dividend payout. However, we anticipate relatively weak earnings for the Tier II names.