Concerns over a recession rise as the economy contracts 6.10% in second quarter

What shaped the past week?

Global: -

Global markets traded in a mixed manner last week as optimism in the markets, sparked by positive COVID vaccine news, was offset by rising COVID cases around the globe. At the start of the week, reports out of the US stated that the Trump administration is expected to expedite the approval process for Oxford’s COVID-19 vaccine candidate, which is being manufactured by British pharmaceutical firm AstraZeneca. Meanwhile, in Europe, data from the Ifo Institute for Economic Research in Munich revealed that business confidence in the region’s largest economy Germany, improved better than expected for the month of August. In addition, GDP data for the country revealed a 9.7% contraction in Q2’20, however markets responded positively to the release, as it came in lower than expectations. In Asia, markets on the region kicked-off the week on a positive note, as optimism in the region, as with other makers remains driven by developments in the COVID-19 vaccine sphere. Global markets maintained their sideways trading pattern over the course of the week, as positive news on a vaccine remains a primary trigger for buying activity in global markets, as economies around the world continue to feel the deep impact from the pandemic. At the latter stages of the week, US FED Chairman Powell, announced a shift in policy for the FED, as the US undergoes “underlying changes” to its economy. He further stressed that the FED will maintain its low interest rate environment as the economy continues to recover. Finally, in Asia, ongoing tensions between the White House and Chinese businesses, remains a driver of activity in the region’s largest economy. ByteDance, the parent company of TikTok is expected to challenge President Trump’s executive order, which gave the TikTok arm 45 days to sell its US business operations to a US firm. Meanwhile, Japan and the UK are expected to sign a free-trade agreement in September. However, details of the agreement are yet to be released; however, it is expected that some parts of the deal will be similar the agreement between Japan and the EU. Under that agreement, there will be preferential tariffs aimed at, minimizing Brexit’s impact on Japanese businesses.

Domestic Economy: Last week Monday, the National Bureau of Statistics released the much anticipated Q2 GDP numbers. Nigeria recorded its worst contraction since the GDP was rebased amounting to a -6.10% slump year-onyear. This is attributed to the preventive measures taken to curb the spread of the virus, which warranted a full 5-week long lockdown. This had significant impact on both oil (-6.63%) and nonoil (-6.05%) sectors. Broadly speaking, 13 out of 19 sectors contracted with Transport & Storage (-49.23%), Accommodation & Food (-40.19%) and Construction (-31.77%) being the most hit by the pandemic due to reduced economic activity. Our attribution analysis reveals that 5 broad sectors were responsible for the slowdown, jointly contributing 40.75% to the GDP - Trade (-16.59%), Mining (-6.60%), Manufacturing (-8.78%), Real Estate (-21.99%) and Construction (-31.77%) sectors Trade (-16.59%) remained in the woods as travel bans and border closure disrupt supply chains.

Agriculture (+1.58%) was spared the onslaught due to time lag involved in production, but flow to market was hindered by inter-state lockdown. In line with expectation, ICT (+15.09%) and Financial Services (+18.49%) outperformed the economy due to increased adoption of digital services and creditfriendly policies of the CBN. Going forward, we expect the economy to contract by -2.21% in FY’20 due to adherence to OPEC production cuts, trade disruptions and currency depreciation.

Equities:

The local bourse traded in a relatively positive manner last week, advancing 35bps w/w. The Consumer Goods sector led the gainers, advancing 112bps w/w, due to gains witnessed in NB (+278bps w/w) amongst others. Meanwhile, the Industrial Goods sector closed marginally higher w/w, advancing 64bps as interest in the space recovered in the past week. On the other hand, the Banking sector closed lower, shedding 23bps w/w, driven by losses recorded in FBNH (-198bps w/w) and UBA (-155bps w/w). Finally, the Oil and Gas space closed flat on the week. For the week, volume traded was 12.74% higher than the previous week, while value traded was 27.06% lower on the week.

Fixed Income:

On Wednesday, the CBN conducted a PMA, where they offered and sold 197.55 billion across the 91 – Day, 182 – Day, and 364 – Day maturities at stop rates of 1.14%, 1.80%, and 3.34% respectively (Effective yield: 1.148%, 1.816%, and 3.455%). Meanwhile, the fixed income space traded in a relatively mixed manner this week, as interest in the space remains relatively tepid amid rising concerns of an economic recession. In the bond space, interest at the short end of the bond curve saw yields on benchmark bonds ease 8bps w/w. Meanwhile, with investors faced with limited investment alternatives, they maintained their interest in the OMO space, where yields eased 52bps on average. Finally, a mix of buying and selling days in the NTB space saw yields close flat on the week.

Currency:

The Naira remained appreciated 5.31 at I&E FX Window to settle at

380.69 and while closing flat at 474.50 against the dollar in the parallel market.

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

Investors continue to cherry pick attractive counters as the domestic bourse extended its weekly bullish run, despite low trading turnover. We expect the market to be driven by the long-awaited results of the Tier 1 banking stocks in the coming week, coupled with continued bargain hunting activities in the Consumer goods space.

Fixed Income market: We expect the healthy system liquidity to further drive buy sentiment across the market at the start of next week.

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

- Strong half-year performance despite provisions surge

Currency devaluation impacts multiple income lines

FBNH recently released H1’20 results, posting a 6% y/y (from a restated H1’19 result) improvement in Gross Earnings to N296.6 billion. However, the bank reported a 7% y/y decline in Net Interest Income, on the back of lower Interest Income (H1’20: N207.4 billion, H1’19: N216.8 billion) and higher interest Expense. Meanwhile, Non-Interest Income rose by 40% y/y to

89.1 billion despite a N6.2 billion FX loss in Q2. On the other hand, Impairment charges surged to N30.7 billion (H1’19: N22.1 billion) during the period, with 66% of this coming in Q2 alone as a result of the translation impact of the bank’s foreign currency loans. However, the bank managed to tame Opex in the period, reporting only a 1% y/y climb to

148.2 billion as a result of a 66% y/y drop in operational losses. Overall, this resulted in a 15% y/y increase in PBT to N41.4 billion and PAT from continuing operations of N35.6 billion. The bank also announced the sale of its insurance business during the quarter, resulting in a profit from discontinued operations of N11.3 billion in Q2 and 13.8 billion for H1, bringing PAT for the period to N49.5 billion. This gives an EPS of N1.35 for the period.

FX strategy key to boosting performance in H2

In Q2’20, FBNH reported a 14% q/q decline in Gross Earnings on the back of a 2% decline in Interest Income (Although Net Interest Income rose q/q, thanks to a 29% decline in Interest Expense) and a 37% q/q drop in Non-Interest Income. The losses reported in FX trading were a departure from industry expectation, as the general expectation within the sector was that banks would gain materially from any devaluation depending on their netopen position. Going forward, based on the bank’s current debt profile and FX holdings, we expect impairments to remain high in the coming quarters, even outside the possibility of a further currency devaluation. Furthermore, the bank’s loan-book shrank 3% q/q to N1.99 trillion, an indication that further strategic shedding of legacy loans will continue at pace in the coming quarter.

TP revised to N10.57 (Previous: N11.37)

Based on the bank’s H1 performance, most especially Q2, we have adjusted our earnings expectations to reflect the realities of the bank’s operations going forward. First, we lowered our Gross Earnings projection to N573 billion (Previous: N637.8 billion). We also raised our provisions expectation to N70.9 (Previous: N35.5 billion) while lowering our Opex estimate to N292.3 billion (Previous: 338. 0 billion). Whilst this lowers our overall PBT expectation to N69.9 billion (Previous: N86.1 billion), the bank’s divestment from its insurance business will prop up PAT significantly, giving a final PAT expectation of N74.3 billion (Previous: N74.5 billion). This gives us a final EPS of N2.07 and DPS of N0.23 (2019: N0.20). Based on the fundamentally weaker income from continuing operations, we have lowered our target price to N10.57 (Previous: N11.37) and reiterate our BUY rating on the stock. .

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.