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The Market Today - 6 April, 2017

Banks’ asset quality dwindles as NPL ratio rises

According to the Financial System Stability Report from the CBN for December 2016, asset quality deteriorated across the banking sector, with Non-Performing Loans (NPL) ratio rising to 14.0% from 11.7% in June 2016 (CBN threshold of 5%) amidst rising inflationary trend, negative GDP growth and naira depreciation. Pressured by weaker oil prices and production shocks as well as the resulting energy and currency challenges, we recall that the credit exposures to Oil & Gas, Manufacturing, and General Commerce sectors (cumulatively accounting for over 50% of gross sectorial credit) have deteriorated significantly leading to higher NPL ratios across the space. Consequently, Return on Assets (RoA) declined to 1.3% (June: 2.3%) following higher provisions for NPLs and weaker efficiency as Non-Interest Expenses to Gross Income ratio rose to 63.8% (June: 54.6%). Furthermore, Capital Adequacy Ratio moderated to 13.9% (June 2016: 14.7%) as bloated loan portfolio (following currency devaluation) and weaker earnings pressured the capital ratio.

We note the deteriorated performance across all the major indicators (profitability, efficiency, and solvency ratios). Whilst we expect the challenges to persist in the near term as the major headwinds remain unabated, we foresee mild improvement ahead, boosted by stronger oil price and volume expectation as well as the recent improvement in FX liquidity. 

Blue chips send NSE ASI soaring, up 81bps

After a three session downtrend, the NSE ASI reversed course at mid-week (up 81bps), steered by ample gains across key sectors. We expect further gains in the coming session given the fairly strong interest across key counters.

Stock Watch: Following positive market reaction to FY’16 earnings announcement, OANDO has gained 16% over the past two sessions, including a limit up close yesterday. Consequently, the stock has surged to a year high of ₦5.78 – translating to a year-to-date return of 23%.

Bullish trading in bills market amidst PMA

The T-bills market gathered momentum yesterday as yields across different maturities raced south. However, trading was mixed in the bond space with the most significant change observed on the yield of the 15.54% FGN FEB 2020 bond which advanced 10bps to close at 15.87%. Given the higher-than-expected stop rates at yesterday’s PMA, particularly on the 364DTM bill, we expect bearish trading today as yields extend towards PMA levels.