De­spite tough year, banks seen end­ing 2018 with higher ROE, profit mar­gins

Business Day (Nigeria) - - NEWS - BALA AUGIE •Con­tin­ueson­lin­eat www.busi­ness­

2 018 was tough year for banks in Africa’s largest econ­omy as stocks ca­pit­u­lated to global geopo­lit­i­cal risk, a slug­gish growth in econ­omy and the un­cer­tain­ties sur­round­ing elec­tions. The bear­ish trend has spilled into 2019.

Amid these global and lo­cal macroe­co­nomic head­winds, an­a­lysts fore­cast that the coun­try’s lenders will turn each Naira col­lected in rev­enue into higher profit to end 2018 fi­nan­cial year, but they are of the view that such uptick could wane in 2019.

For in­stance, the Nige­rian Stock Ex­change Bank­ing In­dex (NSE Bank­ing 10 or list of the most cap­i­talised and liq­uid firms) is ex­pected to post profit mar­gin of 25.12 per­cent in full year 2018, from 17.48 per­cent recorded in 2017, ac­cord­ing to data com­piled from the Bloomberg Ter­mi­nal.

“If we are to go by their per­for­mance in the third quar­ter of 2018, they should post good num­bers in the fourth quar­ter be­cause they are com­ing from a low base,” said Wale Olusi, eq­uity re­search an­a­lyst with United Cap­i­tal Re­search Ltd.

“Even though rev­enue will be low, we be­lieve lower im­pair­ment charges will bol­ster profitabil­ity. The sizes of their loan losses have re­duced and that will sup­port profitabil­ity. The likes of First Bank Hold­ings Nige­ria Plc, Stan­bic IBTC Hold­ings and Zenith Bank had re­duced loan loss ex­pense,” said Olusi.

Bank stocks have been beaten down as they con­tinue to op­er­ate in a volatile and un­pre­dictable macroe­co­nomic en­vi­ron­ment.

Nige­ria’s broad eq­uity mar­ket tracker, the bench­mark NSE all share in­dex, has re­turned neg­a­tive 5.09 per­cent year-to-date, while the gauge for Nige­ria’s top 10 banks is down 3.87 per­cent in the same time pe­riod.

The de­clines are largely driven by neg­a­tive sen­ti­ment as the coun­try gears up for pres­i­den­tial and par­lia­men­tary elec­tions in Fe­bru­ary, and the po­lit­i­cal en­vi­ron­ment be­comes in­creas­ingly un­pre­dictable.

Selloffs were also driven by a com­bi­na­tion of trade spat be­tween the United States and China and the hike in in­ter­est rates by the US Fed that made in­vestors dump Naira as­sets in pur­suance of at­trac­tive for­eign as­sets.

“I think that for­eign port­fo­lio in­vestors are wait­ing on the side­lines and they are find­ing de­vel­oped as­sets more at­trac­tive be­cause of the in­crease in rates in ad­vanced economies,” said Kay­ode Tin­uoye, fund man­ager at United Cap­i­tal As­set Man­age­ment Ltd.

“Why would they stay in a coun­try where the out­comes of elec­tions are un­cer­tain? Re­call that this is elec­tion pe­riod for some African coun­tries,” said Tin­uoye.

Nige­rian banks are ex­pected to utilise share­hold­ers’ as­sets in gen­er­at­ing higher profit as re­turn on eq­uity (ROE) is ex­pected to hit 17.49 per­cent in full year 2018, from 11.49 per­cent recorded the pre­vi­ous year, ac­cord­ing to data com­piled from the Bloomberg Ter­mi­nal.

“It’s not go­ing to be dif­fer­ent from what they de­clared in the third quar­ter be­cause there hasn’t been any stim­u­lus to lend,” said Glo­ria Fadipe, head of re­search at CSL Sock Bro­kers Ltd.

The re­bound in crude oil prices that helped the coun­try exit its first re­ces­sion in 25 years is a boon for lenders as­non-per­formin­gloans(npls)have im­proved while im­pair­ment charges on fi­nan­cial as­sets have re­duced.

The ac­cu­mu­lated im­pair­ment charge of 13 largest lenders that have re­leased third quar­ter re­sults fell by 31 per­cent to N170.06 bil­lion, from N246.83 bil­lion the pre­vi­ous year.

Drilling down the fig­ures shows First Bank Hold­ings Nige­ria (FBHN)’S loan loss ex­pense fell by 21.93 per­cent to N76.18 bil­lion in Sep­tem­ber 2018, from N97.58 bil­lion the pre­vi­ous year.

Zenith Bank Plc’s im­pair­ment charge dipped by 69.52 per­cent to N14.33 bil­lion in the pe­riod un­der re­view as against N47.05 bil­lion the pre­vi­ous year.

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