CardinalStone Research
Executive Summary
The COVID-19 pandemic and oil price shocks have led to costly global economic disruptions. With Nigeria hugely reliant on a well-functioning global economy for trade, and stable oil prices for FX earnings and budget funding, there is a strong probability that the domestic economy will plunge into another recession in 2020. Nigerian banks are hardly insulated from the impact of the shocks, given how intertwined the financial industry is with the workings of the macroeconomy. In some ways, parallels are already being drawn with the most recent banking system crises, and the resilience of the sector is being called into question once again.
In our FY’20 outlook report, we highlighted that regulatory concerns, credit creation, movement in the yield environment, and NIR worries were the key issues banks were likely to grapple within the year. Clearly, the rapid spread of COVID-19, alongside its disruptions to pre-existing economic and socio-cultural dynamics, has expanded the pressure points likely to further strain banks’ performances in FY’20.
The market reaction towards risk assets have been largely overwhelming, with investors rotating towards safer havens. Nigerian equities have been beaten, with the NSE banking index losing 25.9% in the last three months. In this report, we compare valuations with those of peers across the Middle East and North Africa (oil producers in particular), Sub-Saharan Africa, and Frontier Markets. Our analysis suggests not only a persistent undervaluation but also a widening valuation discount between Nigerian banks and peers.
We note that the risks remain. Persistent weakness in oil prices could have inimical consequences for banks’ exposure to oil and gas. It is unclear how long the COVID-19 pandemic will linger, but a committee of African Finance Ministers has suggested that it could take Africa between two and three years to fully recover from the current economic impact of the viral spread. What is clear, however, is that it is highly probable that Nigeria, like the rest of the world, could be set for another recession in 2020.
