CardinalStone Research: Banking Sector – Q3’17 Earnings Outlook

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CardinalStone Research: Banking Sector - Q3'17 Earnings OutlookCardinalStone Research: Banking Sector - Q3'17 Earnings Outlook
On the back of a review of the H1’17 results of banks under our coverage, we have made corresponding adjustment to our projections and valuations. Following our revision, UBA and FIDELITY tops our favourite list, whilst we downgrade STANBIC to a HOLD (previous rating: BUY). We also increased our target price on GUARANTY though we retained our HOLD rating on the counter.
Below, we have highlighted key themes we believe will impact Q3’17 earnings.
 
Yields on government securities to still support interest income in Q3’17
Amidst strong apathy for credit risk assets, banks under our coverage recorded an average growth of 37.6% in interest income as at H1’17 – buoyed by the high yield environment. In Q3’17, we expect banks to continue benefiting from attractive yields on fixed income. Thus, we project an average growth of 29.0% YoY in interest income across our coverage banks in 9M’17. In recent times, the CBN phased out the one year OMO bills which moderated yields in the fixed income space (yields on 364-days bills fell by 400bps in the last one month), but we believe the impact will be negligible on Q3’17 performance given that the easing started in the last month of the third-quarter. However, if the CBN’s effort is sustained, the impact on interest income may become significant from Q1’18.
NIMs pressure will persist in Q3’17 for banks with expensive deposits
On the flip side, we expect pressure on net interest margin (NIM) from higher interest expense to persist on the back of the elevated interest rate environment in 9M’17. We believe ZENITH, FCMB and ACCESS will be the most impacted: ZENITH and FCMB because of their high composition of corporate deposits – 17% and 32% compared to peer average of 6% and 20% respectively – whilst the high cost of debt incurred on commercial papers will continue to pressure ACCESS NIM.
Bank with strong FX liquidity to continue enjoying derivative income in Q3’17
For non-interest income, we expect UBA, ZENITHBANK and ACCESS to continue to report strong numbers from derivative transactions given their strong dollar liquidity following their Eurobonds Issuance in the last few months. Also, with the overall improvement in FX supply both in the interbank and Investors & Exporters (I&E) window, we expect a spike in income from trade related transactions to consequently boost non-interest income in 9M’17.
Impairment charges to remain elevated in 9M’17
Our view is that impairments across our coverage banks will remain elevated in 9M’17, rising further by an average of c.14% as banks continue to battle the lag impact of the economic recession. Consequently, we believe cost of risk across coverage banks will remain relatively high compared to pre-recession levels. On the syndicated 9mobile loan, we expect exposed banks to take more general provisions as a necessary prudence measure.
Banking Top Picks
Criteria
Fwd. P/B
TP
Upside
Recommendation
UBA
Nigerian bank with the largest earnings diversification and foot prints across Africa. Adequately capitalized (CAR: 20%) with good asset quality (NPL: 3.9%)
0.6
12.96
38.8%
BUY
FIDELITY
Improving corporate governance and quality of reporting. Strong and consistent dividend payment track record.
0.2
2.29
65.9%
BUY
FBNH
Strong revenue generating capacity. Quality and competent management team and improving operational efficiency.
0.4
7.34
20.7%
BUY
*prices as at October 10, 2017
Kindly click here to download our Banking sector Q3’17  Earnings outlook. 
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