President Buhari signs revised 2020 budget as oil revenue takes a hit amid COVID

What shaped the past week?

Global: - It was a mixed week for the global equities space, as markets in Europe and U.S. closed lower, while closing higher in Asia. In the U.S. and Europe, fears of the second wave of the COVID virus, unnerved investors, due to the record number of new cases in the world’s largest economy, the U.S. In the U.S., a spike in new COVID-19 cases notably, in Arizona, Texas and Florida has seen some states rollback reopening measures, in a bid to contain the spread of the virus. In addition, as the nation’s economy stalls amid the second wave of the virus, congressional Democrats announced on Thursday, that they would be requesting a multi-trillion-dollar relief package, aimed at providing funding for state and local governments, as well as for unemployment insurance and direct payments. Meanwhile, in Europe, a slew of economic data releases, dampened investor sentiment. Furthermore, the European Commission’s released a report in which it expects that the Eurozone economy would contract by 8.7% in 2020. Finally, in Asia, an improvement in economic data from China and Japan, boosted sentiment in the region, despite ongoing tensions between the U.S. and China. In China, the Composite Output Index rose from 54.5 in May to 55.7 in June, as business activities, notably in the services sector improved on a m/m basis. Whereas in Japan, a report released by HIS Markit revealed an improvement in the Jibun Bank Services PMI which rose to 45.0 in June. However, the downturn in the Japan’s service sector had eased on a m/m basis, as some companies resumed activities following an easing of lockdown measures.

Domestic Economy:

On Wednesday, the Central Bank of Nigeria (CBN) moved closer to unifying exchange rates in the official market and Investors and Exporters (I&E) window, as it devalued the naira by 5.5% to +380.5/$1 in the official market. The multiple exchange rate environment has resulted in the different rates offered, at the NAFEX window and parallel market, where $1 = +452.00. The Minister of Finance, as well as the head of the CBN, had expressed their positions that both the government and the apex regulator would work towards unifying the exchange rate, as part of its plan to generate more naira from foreign inflows and would seek to manage the rate in a sustainable manner. The unification of the exchange rate could provide offshore investors with guidance on the value of the

relative to the USD and possibly help attract much needed FDI to the country, to spur economic growth in the country.

Equities: The domestic bourse closed marginally lower last week, shedding 12bps w/w as investor sentiment remains muted amid a slowdown in business activities across the country. The Consumer Goods sector fell sharply last well, shedding 396bps driven by losses observed in, NESTLE (-651bps w/w) and OKOMUOIL (-891bps w/w) amongst others. In the Industrial Goods space, losses in BUACEMENT (-250bps w/w) and JBERGER (-627bps w/w), saw the index shed 213bps w/w. On the other hand, the Banking Sector (+585bps w/w) closed higher last week, following the preceding week’s selloffs. ZENITBANK (+951bps w/w) and GUARANTY (+793bps w/w) lead all gainers in the space. Lastly, the oil and gas sector closed lower last week, shedding 67bps w/w, driven by losses recorded in MRS (-978bps w/w) and CONOIL (-10.00% w/w). For the week, volume traded

moderated 6.25%, while value traded grew 46.55% w/w respectively.

Fixed Income: The fixed income space traded in a tepid manner last week, as investors sought after securities in the Treasury Bond market, while they shield away from securities in the Treasury Bills market. In the bond space, interest across the curve saw yields on benchmark bonds ease 12bps w/w; notably, the yield on the 12.75% FGNAPR-2023 eased 132bps to 4.13%. Meanwhile, persistent selloffs throughout the week, saw yields in the OMO space advance 44bps w/w. Finally, in the NTB space, a wave of mixed sentiment in the space saw yield advance 3bps w/w.

Currency: The Naira depreciated N1.0 w/w at the I&E FX Window to settle at N387.00 and depreciated N5.00 w/w to settle at +463.00 against the dollar in the parallel market.

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

market saw a mix of bargain hunting and profit taking during the week as the index traded range bound in most of the sessions. With the continued spread of the Corona virus pandemic across countries and its severe impact on major global and domestic indicators, we envisage a persistently pressured market in the meantime, despite the attractiveness of a number of fundamentally sound stocks hence, a cautious trading strategy is advised. Fixed Income market:

We expect the market to open on a quiet note next week, given the current level of system liquidity, coupled with the overall tepid sentiment about the fixed income market in general.

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 Banking: A minor bump

in the road?

Pandemic disrupts banks’ momentum The COVID-19 pandemic led to a steep denaira cline in crude prices, translating to weaker domestic currency with adverse impact on the general economy and local businesses. Weak economic activity has consequently put a strain on loan obligors, threatening banks’ interest income. Rising inflation, lower disposable income and weaker government revenue/spending, coupled with lower GDP growth have all served to weaken demand, lowering output in the consumer and industrial sectors. Our coverage banks reported positive growth in Gross earnings in Q1, mainly due to the delayed impact of the economic slowdown and surprisingly strong yield on assets (YoA), as much of Q1 Interest Income from consumer loans was booked before the shutdown came into effect. Therefore, we expect the full impact of the pandemic to be more accurately reflected in Q2 and H2 results. Meanwhile, although industry NPL was around 6.0% as of FY’19 and our coverage banks were at an average of 5.6% as of Q1’20-slightly above the CBN’s 5% benchmark- the increased risk of default will likely raise the average in the near-term. However, due to the unique nature of this economic downturn, banks remain fairly optimistic of a swift V-shaped recovery and have deferred some of their income rather than writing them off completely as bad loans. Consequently, we expect Interest Income to suffer in the near-term, as we do not anticipate a greatly improved macro environment in H2. Furthermore, we estimate a modest uptick in NPL ratio of our coverage banks, tempered by the increased repayment periods and moratoriums granted to maintain asset quality. Therefore, amidst the challenging operating environment, we remain positive about the near-term asset quality of Tier-I banks and estimate an average NPL ratio of 6.1% for FY’20 for our coverage, with FBNH, GUARANTY and ACCESS carrying the most impact and weighting on our forecast.

Loan growth to slow down in H2

Due to the outbreak, we expect only modest, singledigit loan growth across our coverage banks for FY’20 due to the increased risk of default and currency devaluation. Given the recessionary impact, it is unlikely that banks will be able to repeat the aggressive loan growth seen in 2019 (20% across coverage), even though the primary incentive for the significant climb in loans (the minimum LDR requirement) remains in place. We expect banks to err on the side of caution, given the level of economic uncertainty in the near-term. Thus far, the CBN has mainly used CRR debits to control excess liquidity and limit activity in the OMO and FX markets, with little attention paid to the LDR. That said, evidence suggests that prior to the outbreak, the minimum LDR was having a significant effect on bank’s lending strategies. Our coverage banks achieved loan-growth of 5.8% in Q1’20, as the drive to meet up with LDR regulations pushed banks to issue short term-loans, with campaigns that were set in motion before the economic reality of the pandemic became clear. Therefore, we have scaled back our loanbook growth forecast for the rest of the year, with only a 48bps increased in loan book expected for the rest of the year.

Tier I dividend to remain flat y/y

The banking sector has historically been a dividend paying sector, with the Tier I names (ex FBNH) paying as high as 40% of earnings as dividends, translating to an average dividend yield in the range of 9% to 15%. Although, in recent fiscal years, we have seen moderations in dividend payments, especially due to the impact of the tougher operating environment and as banks have sought to retain more earnings in a bid the maintain adequate capital buffers. That said, we expect dividend payout to remain relatively strong, particularly across the Tier I names. The IMF has advised banks to cut back on dividend payments in order to build up their capital base. However, due to the nature of the local equity space, any significant reduction in dividend payout would likely dampen investor sentiment and spur exits from the sector. Therefore, while we do not expect a y/y increase in dividend payout, we do foresee, at least, flat dividend payout for FY’20, with interim dividends likely to remain flat also.

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.