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The Market Today - 25 January 2019

CBN plans to introduce tougher bank capital rules

The CBN has divulged plans to introduce new capital rules for the banking sector in the second quarter of the year. In a mail correspondence with Bloomberg, the apex bank stated that the new requirements will have stricter definitions of capital and will introduce capital conservation and counter-cyclical buffers, in line with the Basel III global accords. We believe the implementation of this new regulations could lead to banks raising fresh capital to prevent falling short of the required capital level. We recall that the CBN migrated banks to the new IFRS 9 accounting standard last year to improve disclosures by adding provisions for existing loan losses as well as future losses. Nigerian banks have struggled with Non-performing loans (NPL) with average NPL as of H1’18 equal to 12.4% of total credit, an improvement from 2017, when the average NPL ratio was close to 15%, according to the CBN. We believe the risk guidelines and stronger capital standards will help shape more sustainable growth in the banking sector and reduce the risk of a financial crisis.                               

Bargain hunters maintain market’s positive streak                                             

The NSE ASI closed 36bps higher yesterday, lifted by green closes in three of four key sectors. Notably, trading volumes and activity followed recent trend with Buy sentiment observed on smaller stocks. Market breadth remained positive with 26 advances and 21 declines. Whilst the market has continued to see consistent bargain hunting, investor sentiment has remained tepid. Thus, we foresee a mildly positive close to the week.                                          

Stock Watch: After losing almost 16% ytd, SEPLAT is one of the worst-performing large-cap stocks in 2019. The stock is currently trading at ₦530.00 and would have to gain 86% to reach its consensus target price of ₦1,006.93. The stock has yielded a -17% return in the last twelve months.                    

Liquidity constraints fail to dampen T-bills interest                                             

Amid a ₦382 billion maturity, the CBN sold ₦360 billion at an OMO auction (₦450 billion offered) across the 91DTM, 182DTM and 364DTM bills at stop rates of 11.90%, 13.50% and 15.00% respectively (effective yields: 12.26%, 14.47% and 17.64%). The CBN also held a special OMO, selling ₦50 billion of the 364DTM bill. In spite of the net mop up, the Interbank Call rate declined 267bps to settle at 12.33%. As the CBN continues to maintain a tight hold on liquidity, we expect trading to be tepid in the T-bills space to close out the week. We also foresee further yield advances in the bond space as investors tread cautiously ahead of next week’s bonds PMA.