March 12, 2019/Coronation Research
The reporting season for banks continues with two high-quality banks (see page 2) enjoying big increases in Non-Interest Income in 2018 – critical in our view, for long-term growth.
Last week, the NIFEX rate remained stable at NGN358.79/US$1. The NAFEX rate appreciated by 0.09% to NGN360.46/US$1. The US dollar in the NAFEX (inter-bank) market trades at a 0.47% premium to the NIFEX rate. We are moving closer to a single exchange-rate system.
The Central Bank of Nigeria (CBN) this year has supplied US$727m to the NAFEX market. With the CBN’s FX reserves currently at US$42.3bn, we reiterate our view in Coronation Research: Year Ahead 2019, A tale of two halves, 15 January, that FX reserves are sufficient to ensure stability of the Naira exchange rate in 2019.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity rose by 43bps to 14.31%, and at 3 years fell by 8bps to 14.55%. The yield on a 364-day T-bill rose by 1bp to 15.03%. The yield on a T-bill with 3 months to maturity increased by 176bps to 12.42%.
As we commented last week, there is a new reality in Naira interest rates with a 1-yr 15.03% yield looking like the new normal (17.24% was normal two weeks ago). Volatility in the 10-yr FGN bond reflects questions over how far the rate decline will go. This week we expect inflows from open market operations (OMO) maturities of N126.4bn (US$352m) and T-bills maturities of N89.5bn (US$249m) to offer liquidity while the CBN is likely to hold an OMO auction. We await the outcome on rates.
The price of Brent rose by 1.03% last week to US$65.74/bbl. The average price, year-to-date, is US$62.68/bbl, 12.57% lower than the average of US$71.69/bbl in 2018, but 14.48% higher than the US$54.75/bbl average seen in 2017.
According to Reuters, the United States is pressuring India to stop purchasing crude oil from Venezuela. Such moves, combined with Saudi production cuts, are holding prices up. We are looking at an average US$58.00/bbl this year.
The Nigerian Stock Exchange (NSE) All-Share Index recorded a loss of 0.31% last week, taking the year-to-date return to positive 1.57%. Last week International Breweries (+8.00%), Cadbury Nigeria (+5.77%) and GTBank (+5.07%) closed positive, while PZ Cussons (-13.38%) and Nigerian Breweries (-6.25%) fell.
Full-year results – Banks
Last week, two banks under our coverage (GT Bank & Stanbic IBTC) released their audited FY 2018 results. The results were largely in line with market expectations.
GT bank reported net profits of N184.6bn (US$512.8m), which grew 10% y/y. This stellar performance was largely driven by non-interest income that grew 41% y/y and a significant reduction in loan loss provision, down 60% y/y.
Asset quality improved with non-performing loans (NPL) trending down from 7.66% at FY 2017 to 5.67% at FY 2018, approaching the prudential threshold of 5.00%. Loan loss provisions were also down 60% y/y relative to FY 2017.
Expenses ticked up by 1% y/y, as the bank was able to manage its costs through a significant reduction in finance costs and communication expenses. The increase was sub-inflationary. The average level of inflation in 2018 was 12.15%.
Stanbic IBTC reported net profits of N74.4bn (US$207.4m), up 54% y/y. Growth was largely driven by non-interest revenue which grew 15% y/y and reduction in loan loss provision, down 111% y/y. The bank was unable to keep operating expenses at bay as its cost-to-income ratio rose by 308bps. The growth in operating expenses (11.1% y/y) was slightly less than average inflation at 12.15%. This was induced by a significant increase in staff costs and AMCON charges.
The cost of risk fell by 590bps y/y as asset quality improved (beyond our expectations). The loan loss provision decreased by 111.2% y/y due to a N2.9bn write-back from previously-impaired loans. The NPL ratio trended downward from 8.7% in FY 2017 to 4.0% in FY 2018, below the regulatory benchmark.
All in, GT bank proposed a total dividend of N2.75/s (inclusive of N0.30/s interim dividend), while Stanbic IBTC declared a dividend pf N2.50/share (inclusive of the N1.00/s interim dividend) for FY 2018.
We have a Hold recommendation on GT bank with a target price of N35.00/s (current price: N37.30/s) while we have a Buy recommendation on Stanbic IBTC with a target price of N66.00/s (current price: N48.00/s).