Analysts see bank earnings spike on new CBN rules

As the nation awaits the release of lenders’ half year results any moment from now, analysts are increasingly becoming optimistic that the new flexible foreign exchange policy introduced by the Central Bank of Nigeria (CBN) will spur banks to growth as earnings are expected to spike in subsequent quarters, on the back of increased revaluation gains.

Following the introduction of the flexible interbank market, there has been expectation of significant improvements on the FX trading income line, as since mid-February 2015, FX trading has been largely non-existent interbank.

“We expect rising interest rates to be net positive for the larger and more liquid banks. Naira depreciation is also positive for FX margins,” said Adesoji Solanke, head research, Nigeria and Sub-Saharan Africa banking analyst at Renaissance Capital, in a June 27 note  to BusinessDay.

“A number of banks have varying FX long positions. Given the potential for the naira to weaken beyond NGN300/$, we think these positions will be crucial in providing the banks with a capital and asset quality buffer, said Solanke.

Analysts at Renaissance Capital said following the introduction of the flexible interbank market, they expect significant improvements on the FX trading income line, as since mid-February 2015, FX trading has been largely non-existent interbank.

The CBN threw in the towel last month, when it announced a flexible exchange rate regime aimed at making currencies more accessible.

The apex bank’s decision to clear the $4.6 billion backlog of FX demand ($532 million settled at spot, with $4.02 billion settled, using one- to three-month forward rates), at a rate of N280/$, took approximately N1.3 trillion out of the system.

“For the banks, we expect FX trading gains to swell in FY-16E with the tier 1 banks benefiting the most, given that they are all likely to be FXPDs,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited,  in an emailed  note to BusinessDay.“This is consistent with the jump in banks’ FX trading income in Q4-14 and Q1-15, when the NGN was devalued. Most of the banks in our coverage have net FX assets, so should see revaluation gains on higher USD/NGN,” said Ibrahim.

The cumulative net income of 13 banks that have released first quarter financial statement of the floor of the NSE shows net income dip by 15.60 percent to N572 billion from N678 billion the previous year, data gathered by BusinessDay shows.

Cumulative interest income of the 13 lenders fell by 1.25 percent to N554.58 billion in March 2016 compared to N561.61 billion in March 2015 as FX restrictions, limited credit growth dampeded top lines.

The liberalisation of the FX market will impact the performance of banks through CAR and their net foreign asset/liability exposure, according to Olutola Oni, analysts at WSTC Financial Services, in an emailed note to BusinessDay.

“This has improved sentiments about the performance of the Nigerian economy and the financial markets. This has also resulted in a review of the prices of Nigerian assets, as can be seen in the performance of the equities market in the past few trading sessions,” said Oni.

Godwin Emefiele, the CBN governor, has faced calls for more than a year to devalue the currency ,as foreign investors were put off by the capital controls needed to defend the currency’s peg at N197-N199.

Consequently, investment into the country fell and economic activities slowed, as manufacturers were unable to import raw materials for the purpose of production.

Economic growth contracted to 0.4 percent, the lowest since 2004 while inflation hit a six year high of 15.60, fuelled by increased price of gasoline and rising price of food stuff.

RenCap   gave a buy to GTB, Zenith Bank, Access Bank and UBA. This is following the 40 percent-plus naira depreciation and the liberalisation of FX markets; as well as the rise in interest rates.

“While we believe these developments could improve sector earnings in the near term, global risk sentiment will be key to price performance and capital inflows. We have updated our forecasts and our top picks are now Guaranty Trust Bank (on fundamentals) and United Bank for Africa (UBA; on upside potential). We maintain our BUY ratings on Zenith and Access, and upgrade FBN Holdings and FCMB to hold (from Sell)”, Solanke.

BusinessDay