LCCI: Civil Unrest Cost Nigeria N700 billion

What shaped the past week? Global:

Global markets were largely bearish last week, as rising COVID-19 infection rates across the EU and other parts of the globe weighed on sentiments in global equity markets. In the U.S., a lack of clarity from government officials as to the timing of another round of stimulus coupled with mixed corporate earnings, soured sentiment over the course of the week. U.S. House Speaker Nancy Pelosi and U.S. Senate Majority Leader Mitch McConnel hinted that both sides believe they can reach a bipartisan agreement on a fourth COVID relief package; however, Mrs. Pelosi cautioned that House democrats would no longer negotiate with their GOP counters should they fail to reach an agreement on a larger coronavirus package for the U.S. economy. Meanwhile, investors reacted positively to the latest jobless claims data from the U.S. Labor Department. The report revealed a 55,000 drop in claims to 787,000 for the week ended October 17; Sentiments were further strengthened on announcements by Fed officials announced that the recovery in the U.S. was on a steady but modest pace. Moving on to Europe, markets in the region remain weighed down by rising possibilities of a No – Deal Brexit, amid soaring COVID-19 infections which has seen several countries in the region, reintroduce lockdown measures; during the week Austria and Wales announced a tightening in restrictions to combat the spread of the virus. Meanwhile, with EU and U.K. officials trying to hammer out a trade agreement, the aggressive rhetoric from U.K. officials weighed on sentiment in the region over the week. U.K. Minister Michael Gove stated that further negotiations with E.U. leaders would be “meaningless”, sighting that “the union’s proposals, are not consistent with the U.K.’s sovereign status”. However, a moderate improvement in economic data from the U.K., boosted sentiment at the end of the week. U.K. inflation climbed to 0.5% in September, with retail sales surging 17.4% against the previous period to record the largest q/q increase on track. Finally, in Asian markets, rising tensions between the U.S. and China rippled across markets in the region. The Trump administration and congressional leaders, approved an arms sale to Taiwan worth more than $1.8 billion, drawing the ire of the Chinese government and worsening already strained sentiment.

Domestic Economy:

In the midst of an economic slowdown, social unrest caused by the police brutality protests has allegedly cost Nigeria +700bn within the past few days, according to the Lagos Chamber of Commerce and Industry. This has resulted in the need for re-imposition of curfews. The economy had already taken a 6% downturn from the coronavirus-induced lockdowns that reduced production, constrained consumption and delayed investment. Therefore, the resurfacing of curfews alongside looting of businesses and vandalization of properties could reverse the progresses made after the re-opening of the economy. Manufacturing and nonmanufacturing PMIs are yet to recover to pre-pandemic levels as naira weakness, fragile consumer wallets and supply chain disruptions remain. In addition, alleged threats of militant attacks on oil pipelines could stifle recovery in the oil sector, which is already constrained by cartel production limits, weak demand and low oil prices. Containment of unrests via prompt social dialogue and timely intervention would subdue risks of economic regression, even as budget execution has been premised on adequate provisions for addressing concerns of the protest and strike actions. The length of recovery from the looming recession would depend on the economic response to new challenges.

Equities:

Nigerian equities ended the week on a positive note, fueled by gains in the Consumer Goods (+2.86% w/w) space. The benchmark NSEASI edged higher on Friday, advancing 0.13% w/w to close at 28,697.06 points. However, when we look at the other sectors, investors took profit across board, further fueled by the rising civil unrest across the country. The banking sector shed 1.42%, as losses across board notably in FBNH (-4.67% w/w), ACCESS (-3.14% w/w), and ZENITHBANK (-2.55% w/w) weighed on the sector’s performance. Meanwhile, the Oil and Gas sector eased 0.69% w/w, driven by losses in 11 PLC (-4.60% w/w), following an approval from shareholders to the company’s proposal to voluntarily delist from the NSE. Finally, the Industrial Goods sector closed lower, falling 0.06% as WAPCO dipped 5.04% w/w. For the week, volume traded decreased 15.81% w/w, with value traded decreasing 14.56% w/w.

Fixed Income:

Nigerian government bonds sank lower last week, as investors continue to take positions in the space with system liquidity remaining a key driver of the buy-side sentiment witnessed in the market the past week. On Wednesday, the CBN conducted a Bond auction, where they sold N45 billion across the 15-Year and 25–Year Treasury notes at stop rates of 4.97% and 6.00% respectively. Meanwhile, in the bonds space, yields dipped 75bps w/w, as the bulls maintain their dominance in the space. The 10 – Year Treasury note sank 1.09% w/w, to settle at 4.17% and the 20 – Year Treasury note dropped 1.27% w/w to settle at 5.04%. Moving to the T-bills space, the bulls were active here as well, as yields on OMO papers eased 34bps on average, while slumping 63bps on average in the NTB space.

Currency:

The Naira depreciated 1bp at I&E FX Window at N386.00 and while depreciating +3.00 to settle at +460.00 against the dollar in the parallel market.

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

With investors cherry picking attractive counters across sectors, the ASI maintained its positive performance while neutralizing the effect of declines in the Insurance sector as local institutional investors continue to take position in the market. With a number of bellwether stocks expected to release their Q3’20 results into the market in the coming week, we expect the market to be largely directed by the expected earnings results. We also believe the unattractive yield in the FI market will continue to redirect funds into the equities market. However, due to the persistent uncertainties in the global and domestic space, a cautious trading strategy is still recommended in the short term.

Fixed Income market:

We expect the sentiment in the market to remain unchanged, as system liquidity will continue to drive position-taking across all segments of the market. In addition, with oil prices stable, investors should remain keen on the market as they monitor the on-going civil unrest across the nation. However, we note that current liquidity levels could see the Central Bank of Nigeria (CBN) come into the market to mop-up.

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 NIGERIAN BANKING SECTOR - Q3’20 Earnings Preview

In H1’20, banks under our coverage recorded mild but encouraging growth in earnings despite the Covid-19 induced economic challenges. Tier-I lenders (ex-FBNH) showed resilience in their loan growth figures despite the pandemic, with an average loan growth of 30.2% y/y and 1.1% q/q. In absolute figures, the “Big 5” (ex-FBNH) currently account for 52% of total industry loans, but only 40% of industry NPLs, with an average of 5.1%.

In Q3’20, our coverage banks are on course to continue their return to the Q1 trend in terms of profitability. Thanks to some of the policy decisions made in the quarter which favour the banks especially with regard to interest expense, we expect bottom line to improve by 9% q/q, especially for UBA (+25%), ACCESS (+21%) and FBNH (+20%) given our expectations for better cost management, tame provision growth due to the restructuring of loans which began in Q2 and mild improvement in the operating environment during the 3-month period.

However, with treasury yields (T-bills and Bonds) sinking to multi-year lows in August and September, we foresee lower income from securities trading across the sector, as well as lower interest income on securities held at Full Value of Consideration (FVOC). Overall, we believe that the gains made in Interest Income on loans will prove pivotal to the Q3 and 9M results.

We expect our coverage banks to report improvements in average ROAE (from 19.1% as at H1’20 to 21.2% at 9M’20). Furthermore, we expect Cost-to-income to moderate by 119bps on average and industry NPLs to maintain its positive trajectory in Q3’20. On a relative basis, Nigerian banks are trading at a P/B of 0.6x, still far below the same period in 2019 (0.8x) and at a discount to MSCI EM Banks (0.9x). Finally, our outlook for a slow economic recovery and improved macros in 2021 re-emphasizes our view that Nigerian Banking remain very attractive at current levels.

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.