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