Economy contracts 3.62% y/y in Q3’20

What shaped the past week?

Global: Global markets traded higher this week, largely driven by the official start of the transition of power process in the United States as well as optimism over a COVID vaccine. In addition, the PresidentElect has tapped former Fed chairman Ms. Janet Yellen, to head the U.S. Treasury Department under his administration; which further boosted the positive sentiment in the region. Meanwhile, in Europe, ongoing Brexit negotiations weighed on sentiment, as negotiators across both sides of the aisle, remain far apart on key issues surrounding a trade agreement, that would help avert a No – Deal Brexit. Sentiment remains mixed in the region, following the release of the latest business activity numbers for November; business activity contracted sharply as the second wave of the pandemic weighed on activity in the period. However, announcements from the U.K. and French governments on more fiscal spending in response to COVID, boosted sentiment in the latter stages of the week; furthermore investors responded favorably to several announcements from drug manufacturers, with Pfizer stating it expects to start distribution of its COVID candidate in November, while British drug-maker AstraZeneca announced that its vaccine candidate can be stored and transported at normal refrigerated temperature, unlike that of Pfizer’s candidate. Finally, in the Asian region, investors remained bullish amid concerns over a surge in COVID cases in the coming holiday season. The region remained slightly ahead of its peers in the recovery process, which has helped ease investors nerves in the region. With an expected smooth transition of power in the U.S., despite conflicting states from President Trump, investors remained positive in the region, further fueled by positive expectations of coronavirus vaccine in the coming month. A rundown of the global performances for the week, showed that in Asia, the Shanghai Composite and Nikkei – 225 gained 0.91% and 4.38% respectively. Meanwhile, in the Europe, the German Dax gained 1.65%, with the French CAC gaining 1.93% and the FTSE 100 gaining 0.08% w/w. Finally, in the U.S. the Dow Jones had gained 2.21%, while the S&P 500 had climbed 1.98% at close of trade Lagos Time.

Domestic Economy:

According to data from the National Bureau of Statistics, the country officially experienced its second recession in five years having contracted by -6.10% y/y and -3.62% y/y in the second and third quarters of 2020, respectively.

The less severe contraction is attributed to a slower contraction in the non-oil sector (Q3’20: -2.51% y/y) despite a worse turnout from the oil sector (Q3’20: -13.89% y/y). The oil sector was particularly dragged by improved compliance with OPEC+ production cuts, which saw crude output fall to a four year low of 1.67mb/d (Q3’19: 2.04mb/d) as the country had to compensate for earlier overproduction. The trade (-12.12% y/y), real estate (-13.40% y/y), and transport (-42.98% y/y) sectors remained devastated by the continued closure of land borders, weak consumer wallets, and supply chain disruptions. The ICT (Q3’20: +14.56%) and agricultural (Q3’20: +1.39%) sectors are the period’s outperformers, as they continued to record growth, while the construction sector (Q3’20: +2.84% y/y) escaped a recession due to the resumption of delayed construction works and improved budget execution. Meanwhile, growth in the financial services sector slowed to 3.21% y/y (Q2’20: 18.49%) as banks cautiously grew their loan books despite the expansionary moves of the CBN. As a result of the less severe contraction seen in

Q3’20 compared to Q2’20, the Monetary Policy Committee held all policy parameters constant in its last meeting for the year. The decision was taken to allow earlier policy measures to permeate the economy in anticipation of a full return to growth in Q1’21 and inflationary pressures moderating in the medium term. The pause in policy action could give the ongoing economic recovery legs to run further from here. This accommodative stance could also provide a measure of support for Nigerian risk assets heading into the new year, amid near-zero interest rates in advanced economies, and a global liquidity glut that has triggered a quest for yield.

Equities:

The local ASI ended the week on a high note, gaining 214bps w/w, fueled by gains in the Industrial Goods space. The Banking and Consumer Goods sectors continued to be on the receiving end of profittaking activity, with both sectors losing 108bps w/w and 64bps w/w. Meanwhile, the Industrial Goods sector surged 440bps w/w, thanks to gains in DANGCEM amongst others. The cement giant climbed 611bps w/w; with

BUACEMENT gaining 477bps w/w as well. Furthermore, the Oil and Gas space enjoyed a moderated level of interest this week, gaining 57bps w/w thanks to gains in Mobil. The oil marketer gained 9.89% w/w. Finally, the telecom players continue to enjoy investor patronage, notably AIRTELAFRI, which surged 700bps w/w, with MTNN gaining 131bps w/w. Trading volume and value fell sharply this week, as fund managers largely maintained their positions in the market; for the week volume and value traded dipped 36.96% and 13.82% respectively..

Fixed Income: Trading activity in the fixed income space was largely mixed last week, as the yield environment, amid higher oil prices weighed on investor sentiment. On Wednesday, the Central Bank of Nigeria (CBN) conducted an NTB auction where it offered and sold N150.62 billion worth of instruments across the 91Day, 182-Day and 364-Day maturities at stop rates of 0.0215%, 0.09% and 0.150% (Effective Yield: 0.0215%, 0.090%, and 0.1502%) respectively. Meanwhile, bond investors remained bullish on Nigerian government debt, evidenced by the 17bps w/w drop in average yield on benchmark bonds. The yield on the 5-Year Treasury note sank 54bps w/w to settle at 1.70%, while the yield on the 10-Year Treasury traded relatively flat over the course of the week to settle at 4.37%. In the OMO space, volatility in oil prices remains a deterrent to interest in the market, as yields edged slightly lower by 3bps on average. Finally, the NTB space saw little to no activity over the course of the week, despite where yields closed at the auction; yields in the space eased 2bp w/w on average.

Currency:

The Naira appreciated N4.25 w/w at I&E FX Window to settle at

390.25 and while appreciating N18.00 w/w to close at

495.00 against the dollar in the parallel market.

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

The Nigerian equity market saw a mixed trading pattern during the week, with buying interest recorded at mid-week, following an extension of profit taking action at the beginning of the week. We expect investors to continue to position in dividend paying stocks in the short term, given where yields are in the fixed income market, however, as seen at the start of the week, the possibility of profit taking cannot be overruled, hence a cautious trading strategy is recommended.

Fixed Income market:

We expect system liquidity to remain a key driver of activity in the market on Monday, notably in the bonds space. Meanwhile, we expect developments in the global macro space to remain at the forefront of investors’ focus in OMO space, while we foresee another tepid session in the NTB space.

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 ZENITH BANK PLC (ZENITHBANK)

- Strong profitability to persist through Q4 for record FY’20

Mild improvements eclipsed by profit hike

ZENITHBANK recently released its 9M’20 earnings, reporting a 4% y/y growth in Gross Earnings to 509 billion (Vetiva estimate: 519 billion). This was mainly driven by a 12% y/y growth in Non-Interest Income to 190 billion (Vetiva estimate: 194 billion), largely due to the significant revaluation gains realized in Q2. Amid this, Interest Income declined 1% y/y to 319 billion; however, Interest Expense also moderated 13% y/y to N94 billion, causing Net Interest Income to rise 5% y/y to N225 billion (Vetiva Estimate: N238 billion). Meanwhile, Opex grew 12% y/y to 213 billion, a tamer growth than what the bank posted in H2, mainly due to the absence of oneoff costs. Furthermore, the bank’s provisions grew 38% y/y to N25 billion, thanks to the bank recording only N2 billion in provisions in Q3. Consequently, PBT improved by a modest 1% y/y to N177 billion, in line with our estimate, while PAT rose 6% y/y to N159 billion as expected. This yielded an EPS of N5.07 and last twelve months (LTM) ROAE of 22.8%.

Q3 performance bodes well for Q4 forecast

The bank’s slight improvements in provisions and Opex meant Q3 PAT came in as expected at 55 billion. The 94% q/q decline in Provisions to 1 billion bodes well for the bank’s provisioning for the rest of the year, with slight economic improvements likely to signal even further reductions in provisions in Q4. Therefore, we lower our FY’20 provisions expectation to N30 billion (Previous: 45 billion). Furthermore, we expect the bank’s Opex to follow Q3 run rate, thus we lower our FY’20 projection to N283 billion (Previous: N291 billion). However, Net Interest Income fell short of expectation, as the decline in Interest Income in Q3 was greater than expected, whilst Interest Expense rose q/q unlike other banks as interest payments on savings and deposits remained high despite the lower interest rate environment. Therefore, we have revised our FY’20 Net Interest Income to 310 billion (Previous: 315 billion).

TP revised to 31.99 (Previous:

N30.98) Overall, despite our downwards revisions to Net Interest Income and Non-Interest Income, we have raised our FY profit projection to N215 billion (Previous: N204 billion), due tour improved Opex and Provisions projections. Consequently, our FY’20 EPS of N6.85 (Previous: N6.49) yields a target price of N31.99 (Previous: N30.98). ZENITHBANK is currently trading at N25.60 with P/B and P/E ratios of 0.9x and 3.8x vs. Tier I averages of 0.8x and 4.0x 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 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.