After a nervous start at the beginning of 2012 financial year, reminiscent of 2011, Nigerian banks’ earnings momentum have grown through the first half (HI) and are on track to deliver significant returns on equity (ROEs), experts have said.
In a report made available to THISDAY, experts at FBN Capital Limited stressed that banks were on course to deliver, on average, ROE expansion of around 1,500 basis points (bps) in 2012 to 18.8 per cent.
The experts noted that after three years of declining ROEs and in some cases staggering losses, banks had recorded marked year-on-year(y/y) expansion in ROE in H1 2012, and was on track to deliver, on average, a y/y increase of 1,500bps in ROE in 2012.
According to them, year-to-date, their coverage had seen an average capital appreciation of 31 per cent (ASI: 22 per cent).
The experts pointed out that marked improvement in asset quality a key driver, adding that a clean-up of the worst of their balance sheets coming into 2012 was fundamental to banks’ performance.
“As of end-June 2012, the Non-performing Loans (NPL) ratio for our universe stood at 5.2 per cent, compared with an average of 13.4 per cent over the 2009-10 period. Any lingering doubts, which were present at the beginning of the year that 2012 represented a year of recovery for the banking sector (and the markets, given the banks’ weighting in the index), have been decisively dispelled. The earnings of the banks in H1 2012 and their year-to-date outperformance against the index and other major non-financials is visible,” they said.
They added that improvement in the banks’ performance could be traced to the fact that asset quality issues were no longer a chronic problem as they were over the last three years.
This, they added, was evident when comparing the growth in profit before and after provisions on a y/y basis.
“NPL ratios coming into 2012 were the lowest in three years; as of end-June 2012, for the banks in our coverage universe, the average NPL ratio was 5.2 per cent, in line with the central bank’s preferred figure of five per cent. The implication of the reduction in NPL ratios is that provisions in H1 2012 have been relatively low, and have therefore provided a boost to earnings,” they said.
“The replacement of Nigerian Generally Accepted Accounting Principles (NGAAP) with International Financial Reporting Standard (IFRS) accounting has also helped in that NGAAP’s mandatory provisions of one per cent of gross loans are no longer charged to the income statement post-IFRS adoption.
“We estimate that this is equivalent to post-tax savings of about N4.5 billion each for our universe, equivalent to a boost to ROE of about 300bps. In addition, the fact that the value of collateral is taken into consideration when booking provisions has limited the extent of provisions charged to the P&L (there is insufficient information to determine how significant this has been for each bank; we believe the absence of the general loan loss provisions has had a greater impact, however),” they said.