GTCo Holdings, Stanbic IBTC, Zenith Bank offer negative returns
The first quarter earnings review of the Nigerian banking sector on the Nigerian stock market indicates that all is not well in the industry as sector index has returned a disappointing 7.4 percent year to date return to investors. The performance grossly underperformed the broader equity gauge of 24.3 percent delivered by the NGX All Share Index in the review period. BAMIDELE FAMOOFO reports
It has been a challenging 2022 thus far for Nigerian banks’ stocks. Year-to-date, the sector index has returned a disappointing 7.4 percent making it the second-worst performing sector index on the NGX.
Notably, it is the second-worst performing sector index. Stock performance of leading banks were mainly hit by the storm as FBN Holdings, Access Holdings managed to deliver 4.8 percent and 3.8 percent year to date returns respectively while UBA was flattish.
GT Holdco, Stanbic IBTC Holdings and Zenith Bank could not increase the value of worth of their investors, rather it dropped into the negative threshold in the review. GT Holdco recorded (-8.1%) percent, which implies that investment in the stock dropped by 8.1 percent while Stanbic IBTC Holdings and Zenith Bank fell by (-8.3%) and (- 2.6%) respectively.
Meanwhile, the first quarter 2022 was a decent quarter in terms of earnings for the covered banks.
Four of the five banks which published results reported EPS growth; GTCO surprisingly reported an EPS decline.
Notably, most of the growth across the covered banks was driven by increased funded income, following the expansion in banks’ loan books and some upward repricing of loans.
“GT Holdco, Stanbic IBTC Holdings and Zenith Bank could not increase the value of worth of their investors; rather it dropped into the negative threshold in the review”
Higher yields in Q1 22 (vs Q1 21) also saw banks earn higher interest on their investment securities portfolios y/y.
Overall, banks’ Yields on Assets (YoA) were much improved compared with the prior year.
Elsewhere, banks’ Cost of Funds faced some upward pressure. However, they were able to keep rises below the rise in yields. As a result, Net Interest Margins (NIM) was resilient. Non-interest revenues (NIR) also continued on their upward trajectory.
The narrative that the fundamentals of the banking sector are compelling has persisted, even as investor apathy around bank stocks remains.
Analyst’s Opinion
Ope Ani, Senior Analyst at Coronation Capital Limited explained: “In our view, although bank margins and profitability have come down slightly in recent years, bank stocks have been oversold. In an environment where negative inflation-adjusted yields remain the theme, bank dividends continue to offer more attractive yields than Treasury bills. In addition, with yields on the rise, we think FY 21 may have been the bottom in terms of banks’ profitability. The valuations of our coverage banks remain compelling and hold value for long-term investors, in our view.”
Investors’ reaction to the banks’ Q1 22 results has largely been neutral.
Some reasons proffered for this by Ani was that, first, the average gain in EPS (+11.6% y/y) of the covered banks is not that impressive in the context of inflation at 15.9 percent. Furthermore, stripping out the exceptional rebound in STANBIC’s EPS, the average gain in EPS (+5.7% y/y) is not all that impressive.
Second, the domestic equity market has got bigger fish to fry. For example, Brent oil price is sharply up (+38.2% y-t-d) and has propelled stocks like Seplat Energy (+84.6% y-t-d) to all-time-highs.
In addition, palm oil prices are up sharply and have propelled stocks like Presco (+127.8% y-t-d) and Okomu Oil Palm (+51.4% y-t-d). Elsewhere, the telcos have been performing well, and their underlying growth is looking much better than the banks at the moment: MTN Nigeria grew revenue by 22.2% y/y and EPS by 31.5% y/y in Q1 22.
Third, the equity market now seems to be interested in some re-rates, like the Brewers, who reported better-than-expected numbers in Q1. So, the attraction of the banking sector is not so much an EPS growth story as a store of value.
How They Stand
Zenith Bank
Zenith Bank’s Earning per Share (EPS) grew by 9.5 percent y/y following solid growth in Net interest income (NII) (+20.9% y/y), which hit a quarterly record high of N100.54billion, and Non-interest revenue (NIR) (+11.8% y/y). The former was supported by solid loan growth (+5.8% y-t-d) and increased loan yields (+96bps y/y), while a surge in trading revenues (+231.1% y/y) drove the latter. However, on an annualized basis, the achieved EPS missed our and consensus FY 22 forecasts by 14.5 percent and 10.2 percent, owing to a negative surprise on the operating expense (Opex) line.
Operating expenses surged 19.5 percent y/y on increased regulatory costs (AMCON and NDIC) and on the rise in Fuel and maintenance costs, which quadrupled (4.3x y/y), reflecting rising energy costs.
Coronation capital is encouraged by the fact that the group was able to not only substantially expand its loan book but was able to upwardly reprice its loans, benefitting its portfolio yield and NII. In addition, NIR is likely to continue to benefit from the execution of the group’s retail strategy. On the negative, Analysts are concerned about the elevated operating expense profile.
Access Holdings
Access Corporation’s EPS grew by 9.4 percent y/y following solid growth in NIR (+54.9% y/y), which made up 55.4 percent of net revenue (Q1 21: 42.7%). The growth was primarily driven by trading revenues which surged 75.3 percent y/y following a substantial net foreign exchange gain of N85.8billion. On an annualised basis, the achieved EPS is ahead of Analysts’ FY 22 forecasts by 8.7 percent, owing to better-than-expected NIR, which helped offset the miss in NII. Expressly, NII declined by 7.0 percent y/y as Interest expense surged 73.2 percent. The group’s Cost of Funds continues to face pressure, rising 74bps y/y, as the Current and Savings Account (CASA) mix deteriorated by 128bps y-t-d. Elsewhere, Opex also came in higher than expected following increased Premises and equipment costs, IT & e-business expenses and Personnel expenses (+45.8% y/y).
Overall, the results were impressive, considering the high base from the previous year. “We expect strong growth in NIR to continue to drive earnings in FY 22. In addition, we are encouraged by the performance of the Rest of Africa business which grew PBT by 230.7% y/y and contributed 50.4% to the group’s PBT in Q1 22 (Q1 21: 16.5%). Like UBA (BUY, TP: N11.72), the performance highlights the diversification benefits of having Pan-African operations. The company is on track to ‘Win with Africa’, exploiting significant digital and retail banking opportunities, supported by Nigeria and Africa’s demographics,” Ani disclosed. Elsewhere, we like management’s dynamic view on the future of banking, as it makes a foray into the payments space, in addition to insurance brokerage and consumer lending. Consequently, we maintain our BUY rating with a TP of N12.93. ACCESSCORP is trading at a 2022 P/B of 0.3x (ROAE: 18.7%), a discount to its SSA peer multiple of 0.6x and its five-year average multiple of 0.5x.
“The narrative that the fundamentals of the banking sector are compelling has persisted, even as investor apathy around bank stocks remains”
United Bank for Africa
UBA’s EPS grew by 9.6 percent y/y, driven by NII (+14.1% y/y) and NIR (+27.1% y/y). The former was supported by solid loan growth (+6.7% y-t-d) and increased investment securities yields (+13bps y/y), while a surge in trading revenues (+52.9% y/y) drove the latter.
Notably, UBA’s loan growth in Q1 22 alone has surpassed the loan growth in all of FY 21. On an annualised basis, the achieved EPS is ahead of our and consensus FY 22 forecasts by 10.0 percent and 17.5 percent, owing to better-than-expected NIR and a lower-than-expected effective tax rate.
Overall, the results were decent, in our view, with earnings growth in line with peers and Analysts said they expect strong growth in both NII and NIR to continue to drive earnings in FY 22.
“The key investment case remains the earnings diversification benefits of its non-Nigerian African subsidiaries; its exposure to other African markets has provided a natural hedge to the troubles with its Nigerian business. We also like that its Retail strategy is yielding positive results, and it has solid asset quality metrics and a strong capital base. Accordingly, we rate the stock a BUY with a TP of N11.72. The stock is trading at a 2022 P/B of 0.3x (ROAE: 17.1%), a significant discount to its SSA peer multiple of 0.6x,” said Ani.
Stanbic IBTC Holdings
STANBIC’s EPS grew by 35.4 percent y/y, driven by NIR (+40.2% y/y) and NII (+47.7% y/y). NIR was supported by a surge in Trading revenues (+225.9%) which recovered from last year’s record lows. NII, on the other hand, benefitted from solid loan growth (+6.4% y-td), increased loan yield (+94bps y/y) and increased investment securities yield (+167bps y/y). The group did face Cost of Funds (+73 bps y/y) pressure, with its Current and Savings Account (CASA) mix dropping by 330bps y-t-d to 62.7 percent. However, improved Yield on assets (+178bps y/y) offset the pressure and led to 101bps y/y NIM expansion. On an annualised basis, the achieved EPS is behind our and consensus FY 22 forecasts by 15.7 percent and 7.4 percent, owing to higher-than-expected operating expenses and a record high effective tax rate.
Although Opex (+32.1% y/y) grew substantially, the rise in net revenue was able to cushion the pressure. As a result, the group’s Costto- income ratio fell by 538bps to 63.8 percent. Notably, STANBIC was the only bank amongst our coverage to improve efficiency.
Analysts said they are encouraged by the recovery from the highly disappointing performance in Q1 21, especially the RoE uplift.
“We expect improved market yields will positively impact NII and NIM over the rest of the year. In addition, we hope the group can sustain the recovery in trading revenues which have historically been a solid contributor to net revenue. Accordingly, we rate the stock a BUY with a TP ofN45.00. The stock is trading at a 2022 P/B of 1.1x (ROAE: 17.5%), a premium to its SSA peer multiple of 0.6x.”
