IMF lowers global economic growth forecast, expects recession

What shaped the past week? Global:

- On Monday, U.S. President Donald Trump stated that a new stimulus package would be announced “over the next couple of weeks” as the world’s largest economy continues to deal with the impact of the COVID-19 pandemic. Meanwhile, European markets closed lower as investors continued to monitor the rise in new COVID-19 cases around the globe. The coronavirus replication rate, based on a four-day average, in Germany jumped from 1.79% to 2.88% after which Deutsche Bundesbank President Jens Weidmann warned that recovery from the crisis could become “painfully slow.” Over the course of the week, several statements from U.S. officials continued to fuel optimism from global investors; of note, the White House Economic Adviser Larry Kudlow, when speaking with Fox Business, stated that there will not be a second nationwide lockdown in the U.S. Meanwhile in Europe, data released by IHS Markit, revealed an improvement in private sector activity for the month of June, as lockdowns in the region continued to ease. The Flash Eurozone PMI Composite Output Index stood at 47.5 in June, rising to a four-month high. Meanwhile, the announcement of a possible $3 billion tariff on European imports to the U.S. dampened sentiment in the region; the new tariffs are likely to be trigged by the long-running US-EU World Trade Organization dispute over support for the Boeing Co. and its rival Airbus SE. Furthermore, investors remained perturbed by the possibility of a second-wave of the pandemic, amid calls from several U.S. states to impose 14-day quarantine periods for visitors from other at-risk areas.

Domestic Economy:

With nations around the world, slowly easing lockdown restrictions amid the COVID-19 pandemic, the International Monetary Fund (IMF) on Wednesday released its forecast for the global economy, expecting it to contract by 4.9% in 2020. In addition, the fund’s forecast for Nigeria sees the nation’s economy contracting by 5.4%, as a downturn in crude prices, coupled with the lockdown has put pressure on tax receipts for the government. With crude earnings accounting for 60% of government revenue, and 80% of exports, the sharp drop in prices will ultimately trigger a recession in the nation. Furthermore, with the nation’s informal sector accounting for a significant portion of employment and nation’s GDP, the effects of slowdown in economic activity experienced in Q1’20 - which is expected to persist until a medical solution to the virus is found- should lead to a fall in labour productivity and economic output.

After four straight days of losses, the NSE ASI eked out a mild 1bp gain w/w, following an 83bp green close on Friday. Notably, the slight gain was driven by positive performances from the Telecoms sector, with both MTNN (+121bps w/w) and AIRTELAFRI (+997bps w/w) closing in the green. Conversely, save for a flat w/w performance from Consumer Goods names, the other major sectors closed in the red. The Oil and Gas Sector was the largest loser (-484bps w/w) as E&P giant, SEPLAT shed 998bps w/w. Meanwhile in the Banking Space, losses observed across tier-one names saw the index shed 52bps w/w. Furthermore, profit-taking on a few select stocks in the Industrial Goods sector, saw the sector fall 203bps w/w. For the week, volume and value traded worsened by 29.58% and 15.43% respectively.

Equities: Fixed Income:

It was a mixed week of activity in the fixed income space, as market participants sought after FGN bonds across the bond curve, while they showed less interest in NTB and OMO instruments. In the OMO space, yields advanced 13bps w/w, driven by sell-offs at the midlong end of the curve; of note, the yield on the 158DTM OMO advanced 57bps w/w to settle at 5.69%. Meanwhile, with a dearth of catalyst to drive buy-side activity in the NTB space, average yield declined 108bps w/w, as we observed buy-activity at the mid-end of the NTB curve. On the other hand, average yields on benchmark bonds dropped by 61bps, due to keen interest in securities across the bond curve.

Currency:

The Naira appreciated N0.17 w/w at the I&E FX Window to settle at N386.33 and depreciated by N6.00 w/w to trade at N455.00 against the dollar in the parallel market.

What will shape markets in the coming week? Equity market:

The domestic market remained pressured as the fear of the second wave of the Coronavirus took a toll on investors’ confidence (evidenced by four of the five trading sessions of the week closing south). We expect the market to start the coming week on a positive note, amidst portfolio re-balancing for Q2 by portfolio/fund managers.

Fixed Income market:

Next week, we expect more demand in the bond space as investors continue to trade regularly. Market activity will potentially be buoyed by the over &100 billion in NTB and OMO maturities expected to enter the system, expected to be reinvested primarily towards the longer-end of the yield curve.

Currency:

We expect the current volatility observed in the exchange rates across the various windows to persist amid tightened liquidity and increased dollar demand from FPIs. This despite the CBN’s continued intervention in the I&E and Parallel markets.

Focus for the week ACCESS BANK PLC (ACCESS) - Profits remain flat y/y amid Opex surge

Opex growth dampens earnings improvements

ACCESS recently released Q1’20 results, reporting 31% y/y growth in Gross Earnings. The significant increase was mainly due to a low base from Q1’19, as the bank was yet to complete its merger with the defunct Diamond bank at the time; however, the bank’s performance in interest income growth (19% y/y to N131.9 billion) and Non-Interest Income (58% higher y/y at N77.9 billion) was nonetheless noteworthy. Most notably, the bank reported a 320% y/y spike in gains from investment securities to N82.9 billion. This helped to offset a N54.7 billion loss on foreign exchange trading and revaluations. On the other hand, the bank recorded a 153% y/y increase in loan loss provisions to N8.5 billion (Vetiva Estimate: N5.5 billion), a result of the bank’s expanded Loan book. Furthermore, the bank also recorded a spike (65% y/y) in Opex to N95.3 billion, driven by a weaker base in Q1’19, as well as a higher wage bill and a 55% jump in AMCON charges to N17.5 billion. As a result of this, the bank reported a 3% y/y growth in

PBT to N46.3 billion (Vetiva Estimate: N43.5 billion) and flat PAT of N41.0 billion, giving an ROAE of 26.3% (Q1’19: 30.9%).

Management’s cost saving strategy to rescue FY profits

High operating costs of the new ACCESS bank continue to hamper profitability. Amidst the prospect of further moderations in earnings occasioned by the weak economic outlook for 2020 and the poor yield environment, the bank’s cost to income ratio has risen from 53.2% in Q1’19 to 62.2% in Q1’20 (FY’19: 65.0%). While the bank is far from the worst performer among its peers, this issue threatens to further stifle profit growth if not properly addressed. Therefore, management’s guidance on cost cutting measures to address the challenges are positive and could offset the decline in earnings expected in the coming quarters. Going forward, we expect a slight moderation in Opex y/y to &268.8 billion (Previous: N272.6 billion), driven by cost synergies that the bank will continue to realize over the course of the year, with regard to branch rationalization and lower subscription fees and charges and other overhead costs.

TP revised to N11.14 (Previous: N11.35)

As a result of our revised expectations for the banking sector amidst COVID19 outbreak, we have adjusted some line items in our FY’20 estimate. Firstly, we lowered our Interest Income forecast to N457.1 billion (Previous: N515.9 billion) as well as our Interest Expense line to N230.3 billion (Previous: N252.1 billion). We also increased our Non-Interest Income forecast to N175.4 billion (Previous: N150.7 billion). Finally, we raised our loan loss provisions projection to N37.6 billion. Thus, our FY’20 PAT forecast has been lowered to N90.4 billion (Previous: N103.1 billion), with an EPS projection of

N2.50 and a 12-month target price of N11.14 (Previous: N11.35). Thus, we maintain our BUY rating on the stock. The bank’s shares have lost 36% YTD and are currently trading at a P/B of 0.4x vs a Tier-I average of 0.5x.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.