Small lenders set to outperform 2017 FY profits by almost 40%

…contrasting analysts’ views on stock recommendation leave market perplexed

As analysts await earnings for the companies in the Nigerian equity market, the promising outlook of small lenders’ full year earnings in 2018 has failed to translate to a general sense of positive ratings of Tier-ii banks by some investment houses.

The country’s small banks often referred as Tier- II banks have been growing their loan books even as the big banks keep a tight lid on theirs. While the big banks, often referred to as Tier-i banks largely cut back on loans and advances to customers in the first half of the 2018 due to fears of economic slowdown and political uncertainty, small banks increased their loan exposure as the economic recovery narrative resonated more strongly among the smaller lenders.

“The small banks are taking an aggressive approach to lending because they need to grow their balance sheet, while the big banks are holding back and de-risking their balance sheet. The economic growth in the country isn’t convincing and we are struggling with heightened political uncertainty ahead of the 2019 presidential elections,” said Johnson Chukwu, CEO of asset management company, Cowry Assets.

The annualized profits of these companies show that all small banks are set to outperform their 2017 performance by an average of 39.84 percent. The banks set to outperform by large margins include Ecobank (74.79%), Stanbic IBTC (64.62%), FCMB (60.87%) and Wema Bank (55.75%).

The cumulative profits of TierII lenders are set to grow by 86.42 percent from N136.61 billion in 2017 to N254.6 billion by annualizing profits of the period ended as at the third quarter in 2018. Ecobank and Stanbic IBTC holdings were the main contributors to the profits as they both controlled 71.14 percent of the total profits of the 8 banks in review.

However, this did not translate to consensus “BUY” ratings on smaller banks from Meristem Research, EUA Intelligence and Afrinvest Research. FCMB, Fidelity Bank and Wema Bank had the most positive consensus view of the three research firms in terms of potential upside going forward. FCMB was recommended as a BUY from both Meristem and EUA Intelligence while Afrinvest recommended its customers to hold on to the stock.

Meristem was bullish on the broad financial services sector with BUY ratings on all banking stocks which represents the positive outlook on earnings. However, Afrinvest and EUA Intelligence had only small banks as good investment opportunities on their valuation recommendation. EUA Intelligence preferred FCMB and Fidelity to all other small banks while Afrinvest preferred Ecobank and Wema bank.

Sterling Bank and Union bank are the only Tier II banks that started the year on a positive note on the stock exchange recording a positive movement in share price -4.21 percent and 7.14 percent. Unity bank and FCMB have recorded year to date negative returns of 14.95 percent and 10.05 percent respectively while other banks in this category have a year to date negative average return of -6.12 percent.