Federal government raises PMS price to N143.50/litre

What shaped the past week?

Global: - Global markets traded in a mixed manner last week, fueled by optimism over a potential coronavirus vaccine, as certain candidates for the vaccine, entered the Phase III testing stage. Indices in the U.S. posted their best quarters, in decades, as U.S. Treasury Secretary Steve Mnuchin announced that another round of stimulus, for the U.S. consumer, could come at the end of July. Meanwhile, European markets posted moderate gains last week, as investors continued to monitor the rise of global COVID-19 infections, which surpassed 10 million people, with 500,000 recorded debts. The U.K. Prime Minister, Boris Johnson, ruled out the possibility of another lockdown, and stated that his administration would continue, to provide support to businesses, as the combat the effects of the COVID-19 virus on their activities. However, statements from the German Chancellor Angela Merkel, dampened investor sentiment, as she stated the EUbloc still had not reached an agreement on its COVID-19 recovery fund; and that the region should prepare for the realities of a no-deal Brexit. Asian Markets closed lower last week as tensions in the region, notably in Hong Kong and Korea, unnerved investors. News of the Pfizer and BiNTech vaccine candidate successfully creating antibodies against the novel coronavirus in trials, helped boost sentiment in the region, albeit moderately as nations seek to jumpstart their economies, following the easing of lockdown measures.

Domestic Economy: Last week Wednesday, the Federal Government announced a raise in the price band of premium motor spirit (PMS) to between 140.80- 143.80/litre in Jul’20. In Jun’20, the pump price of PMS was pegged at between N121.50 and N123.50 per liter, and filling stations we reselling at the maximum price allowed by the PPPRA. The coronavirus-led downturn in global economic activity and crude receipts made the government change its stance on PMS subsidies earlier in the year, allowing market forces to dictate the retail price of petrol in the country going forward. The 16% upward revision in the pump price of PMS implies that for the month of July, we could see a steeper surge in core prices than in previous months ergo leading to a steeper increase in headline inflation. This would exert more downward pressure on already weak consumption spending in the midst of a slowdown in economic activity and a currency adjustment.

Equities: It was a somber week for the local bourse, as the NSEASI fell 198bps w/w. Losses in the Banking (-752ps) and Industrial Goods (-643bps w/w) weighed heavily on the index, as all other sectors except what) closed in the red as well. In the Banking Space, losses in ZENITBANK (-586bps w/w) and GUARANTY (-837bps w/w) were the primary drivers of the losses observed in the sector. Meanwhile, sell-offs in ARDOVA (-10.73% w/w) and OANDO (-500bps) saw the Oil and Gas sector (-118bps w/w) close lower last week. Moreover, in the Industrial Goods space, the losses observed in WAPCO (-591bps w/w) and BUACEMENT (-233bps w/w) drove the sector lower. Lastly, market heavyweights DANGCEM (-78bps w/w) and MTNN (-128bps w/w) ended the week in the red, as investors continued to remain on the sidelines ahead of Q2 earnings releases.

Fixed Income: The CBN conducted a Primary Market Auction (PMA) on Wednesday, offering and selling 88.85 billion across the 91DTM, 182DTM and 364DTM bills at stop rates of 1.78% (effective yield: 1.79%), 1.91% (effective yield: 1.93%) and 3.39% (effective yield: 3.51%), as yields eased 114bps across the tenors offered. Meanwhile, it was a positive week in the fixed income space, as investors’ interest buoyed by the expected inflow of liquidity over the week, enticed continued buying-activity in the secondary market. In the OMO space, yields eased 10bps w/w, driven by interest at the mid-long end of the curve. In addition, in the NTB space, interest across a broad range of tenors saw average yield ease -36bps w/w. Finally, with investors seeking to reinvest incoming maturities, yields in the bond space eased -68bps, driven by interest across the curve.

Currency: The Naira appreciated N0.50 w/w at the I&E FX Window to settle at 386.00 and depreciated 12.50 w/w to settle at 457.50 against the dollar in the parallel market.

What will shape markets in the coming week?

Equity market: The domestic bourse saw another week of sell pressure as investors’ confidence continue to dampen in the face of global uncertainties and domestic macro-economic challenges. In the absence of positive catalysts capable of spurring BUY decisions, we expect the market to extend its downward trend next week despite the attractiveness of a number of fundamentally sound stocks.

Fixed Income market: System liquidity will continue to dictate the behavior of market participants in the space, as there has been a limited improvement to all other drivers of activity in the space. As such, we expect the market to start off the week on a mixed note.

Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week FBN Holdings PLC - Solid first quarter performance amid economic uncertainty

Non-Interest Income, lower provisions boost Q1 profits

FBNH released its Q1’20 results, reporting a 9% y/y growth in Gross earnings to N159.7 billion (Vetiva estimate: N154.4 billion) despite a 6% y/y drop in Interest Income; a result of the weaker yield environment during the quarter. The earnings beat came as a result of a 57% y/y jump in Non-Interest

Income to N54.8 billion (Vetiva estimate: N47.8 billion). This was due to a 748% spike in income from sales of investment securities during the quarter, as well as milder, 12% y/y gains on fees and commissions. Added to this, the bank also reported only a 1% y/y increase in Opex to N76.6 billion (Vetiva estimate: N79.9 billion) and a 30% y/y decline in loan loss provisions to N9.7 billion (Vetiva estimate: N7.0 billion). The decline in provisions and tame Opex growth indicate that the bank’s strategy of improving efficiency and managing risk is starting to yield results. However, the onset of the COVID19 pandemic is likely to test management’s strategy further in the coming quarter. Overall, the bank reported a 47% y/y rise in PAT to N23.1 billion, ahead of our estimate of N20.6 billion, the highest Q1 profits since Q1’13 (N24.7 billion). This gives the bank an ROAE of 15.3%, up from FY’19 (12.4%).

LDR remains weak despite 10% loan growth

Surprisingly, FBNH reported an 11% q/q growth in loans and advances to N2.1 trillion, outstripping our expectation for slower loan growth in 2020. However, the bank’s 7% growth in customer deposits to 4.3 trillion meant that the bank’s Loan to Deposit ratio (LDR) improved only 16bps q/q to 49.6%. Given the bank’s focus on improving asset qualityNPLs also improved 7bps q/q to 9.2%-we do not expect the bank to place much focus on meeting minimum LDR requirements in the near term. We also expect the apex bank to grant some leeway to banks with regards to the regulation, while continuing to use the CRR debits as a form of liquidity control. Ultimately, the current economic climate does not favour further loan growth, with contractions likely to come in subsequent quarters, as default rates are also likely to increase.

TP revised to N11.37(Previous: N12.00)

Given the bank’s strong earnings beat in Q1, we have revised some of our FY’20 estimates. However, due to the frail economic outlook for the rest of the year, we have tempered any optimism generated by the solid first quarter. Most notably, we raise our loan loss provisions to N36.6billion (Previous: N28.3 billion) following Q1’20trend. Also, we cut our Interest Income estimate to N420.2billion (Previous: N463billion) following the weaker Q1’20run rate and expectations for the rest of the year. Alongside this, we raised our Interest Expense estimate to N178.2 billion, giving us a new Net Interest Income estimate of N276.5 billion (Previous: N290.2 billion). Conversely, we revised our Non-Interest Income estimate hitherto N219.1billion (Previous: N191.3billion). We also lowered our Operating Expense estimate to N357.2billion (Previous: N363.7billion). Overall, we revised our PAT estimate lower to N74.1billion (Previous: N76.0 billion) for FY’20–translating to an EPS of N2.06. Consequently, our Target Price is revised to N11.37(Previous: N12.00). The bank currently trades at P/B and P/E ratios of 0.3x and 2.8x vs. Tier I averages of 0.5x and 2.1x respectively.

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