Despite Challenges, Analysts Bullish on Banking Stocks

By Goddy Egene

Investors in the banking sector should expect impressive returns going by the projections of some investment and financial analysts. According to the analysts, although the recession of 2016 and the devaluation of the naira  heightened risk environment for the banking sector, the banks put up a good performance in the first half (H1) of  2016.

Analysts at   FBN Quest said despite the subdued loan growth picture, banks have been able to deliver strong revenue and earnings growth, capitalising on pricing and foreign exchange (fx)-related gains.

“H1 2017 profit before tax (PBT) growth averaged 32 per cent thanks to double-digit growth on both revenue lines. We expect the trend in H1 to carry on into H2 such that loan growth by the end of 2017 averages a modest four per cent. Having rebounded strongly in 2016 to an average of 18.6 per cent, we forecast the return on average equity (ROAE) for our universe to decline to 17.3 per cent due to base effects: fx-related gains, though visible in 2017, are not as significant as they were in 2016. Our 2018E average ROAE forecast is 16.5 per cent.  GTBank and Stanbic IBTC Bank are forecast to deliver ROAEs well above the sector-average, in the 27-35 per cent range over the next two years,” they said.

The analysts said asset quality risks have been kept under control with the non-performing loan (NPL) ratio of  their  universe averaging 5.4 per cent  in second quarter (Q2) 2017.

“While restructurings have helped, the regulator deserves some credit for strengthening banks’ risk management processes after the last crisis. Although we expect some deterioration in asset quality in H2, we do not expect a doomsday scenario. We forecast a year-end average NPL ratio of 6.1 per cent, with all except Diamond Bank (12 per cent) reporting ratios in the mid-single digit range. Tier 2 banks Diamond and FCMB Group face the highest risk from asset quality deterioration given that their capital ratios are the lowest in the group – 15.4 per cent and 17.3 per cent respectively,” FBN Quest said.

 Speaking on the  prices of stocks  in the sector, the analysts said they have a broadly neutral view on the sector at current levels.

“Compared with the 0.82x price to book (P/B) multiple the sector is trading on currently, our fair values imply that the sector should trade at 0.92x for an average ROAE in 2018E of 16.5 per cent. Zenith, FCMB and Diamond show the greatest upside potential (over 30 per cent), based on our price targets. However, we continue to tread cautiously around tier 2 names. Besides Zenith, our only outperform-rated name, absolute valuations are not compelling enough to argue strongly for aggressive accumulation of tier1 names also,” they said.


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