vetiva research - fy'10 earnings season_are banks still in-the-money
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8/7/2019 Vetiva Research - FY'10 Earnings Season_Are Banks Still In-The-Money
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FY10 EARNINGS SEASON
Nigeria | Equity | Banking
Please see the last 2 pages for important disclosure and analyst certification 1
Are banks still in the money? Prominent Themes
As the FY10 earnings season looms, we gauge the potential buffers and drags on
earnings with a bid to further identify value. Two paradoxical themes continue to
appeal to us: AMCON deal a buffer, and squabbles on the 1% general provisions onPerforming Loans a drag. Overall, we reiterate our 2011 valuation and target prices
on our coverage universe given that we have impounded the upsides from the
AMCON deal into our valuation. As regards the downside risks of the 1% general
provisions on Performing Loans, without undermining its prudency, we believe it is a
short term accounting effect with no impact on the near term fundamentals of the
banks particularly that this contentious provisions will eventually be reversed in the
event of IFRS convergence which has kicked off (banks books are now based on IFRS
reporting effective January, 2011). Please see our earlier updates - AMCON Provides
Cushion for FY10 Books (December 21, 2010) and Provisioning Squabbles (January
17, 2011) for details.
Behavioural tendencies: While we uplift our fundamental valuation with thebelief that our coverage basket is still in the money (based on the current market
prices and our 2011 base case target prices see table below for highlights), we
are cautious to say that the market might react negatively to the FY10 numbers
if the provisions are eventually made. Our opinion on likely market pricing of the
banks on the release of the scorecards is hinged on our earnings sensitivity to the
1% general provisions which reveals that FY10 After-Tax-Profits may slip slightly
below the reported Q310 numbers for a host of our coverage banks. We think the
market will react negatively to such earnings newsflow. This downside risk is
more pronounced when investors modest expectation on FY10 numbers and still-
mixed outlook on polity are put into perspective.
Size effect; more downside risk for big players? Though the probableprovisions effect is an industry-wide phenomenon with no exception for any of the
banks, we believe loan book size and the level of coverage over NPLs will
determine the eventual impact on each bank. As regards loan book size which
apparently suggests that the Tier-1 lenders will take a larger dose of the blight,
we assert that loan book size and earnings are correlated. This means that the
effect of the loan book size should be generically proportional across banks, given
that Tier-1 lenders with larger loan books command larger earnings with more
cushion to absorb shocks. More importantly, the Q310 scorecards show faster
earnings recovery for large-cap banks relative to the mid-tiers. Aside UBA (given
its weak Q310 earnings), the other big-3 banks (FIRSTBANK, ZENITHBANK and
GUARANTY) have relatively adequate earnings cushion for the looming provisions.
Banks
FY'10E I% General Provisions (N'bn) Q3'10 Vetiva FY'10E PAT (N'bn) %
Loan Book(N'bn)*
Absolute Net of Tax ImpactPAT
(N'bn)Ex- 1%
provisionsPost-1%
provisionsof
Provis
FIRSTBANK 1,193.0 11.9 8.9 32.6 46.5 37.6 -19%UBA 640.6 6.4 4.8 6.65 9.6 4.8 -50%
ZENITHBANK 719.0 7.2 5.4 31.13 44.0 38.6 -12%
GUARANTY 580.3 5.8 4.4 26.5 37.1 32.8 -12%
ACCESS 419.5 4.2 3.1 9.56 14.2 11.0 -22%
IBTC 172.1 1.7 1.3 7.18 10.1 8.8 -13%
SKYEBANK 344.2 3.4 2.6 8.55 10.5 7.9 -25%
DIAMONDBNK 303.0 3.0 2.3 4.86 7.9 5.7 -29%
FCMB 324.2 3.2 2.4 4.58 8.8 6.4 -28%
* This is based on our FY'10 forecast of Performing Loan Book
Source: Companies Filings, Vetiva Res
Vetiva Research
17 February 2011
Ana
Abiola Raa.rasaq@vetiva.
YTD Share Price Performance
Banks outperform NSE ASI, Tier-1s lead
7.50%
9.28%
16
6.5%
15
10.4%
12.1%
7.6%
7.3%
9.3%
14
6.4%
9.1%
NSE ASI
Banking Index
FIRSTBANK
ZENITHBANK
UBA
GUARANTY
Tier-1 Avg.
ACCESS
IBTC
SKYEBANK
DIAMONDBNK
FCMB
Tier-2 Avg.
Source: Vetiva Research
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FY10 EARNINGS SEASON
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Can erstwhile conservatism provide asylum? Looking at the possibleeffect of current coverage levels (provisions/NPLs) on earnings stability, we
believe banks with relatively adequate coverage will have marginal asylum if
the risk of the contentious 1% general provisions eventually crystallizes. We
uplift conservative banks with +80% coverage as at Q310, given our belief
that this comfortable level of provisions offer leeway for this class of lenders toreclassify erstwhile above-minimum regulatory specific provisions to general
provisions. Our choice of +80% coverage ratio as a proxy benchmark for
provisions adequacy is informed by our view of the industry NPL portfolio. We
think that 60%, 30% and 10% of the NPLs fall in the Lost, Doubtful and
Substandard categories respectively, thus requiring a minimum weighted
average provisions coverage of 76%. While we believe that the sale of margin-
related NPLs to AMCON have improved the NPL profile of the banks, especially
for the likes of FBN, GUARANTY and FCMB which disclosed their transactions
with AMCON at our recent discussions with the management, we are
conservative to rely on the Q310 details which are in the public. Overall, our
screen for probable asylum suggest less effect on ZENITHBANK and GUARANTY,
which had 109% and 93% respective coverage ratios as at Q310.
Source: Vetiva Research, Companies Filings
Valuation and Rating
*Please see page 3 for our rating criteria. ** Prices are based on February 17, 2011 Close Prices.
Sector Valuation
Tier 1 banks Trailing* Forw
P/E (x) 16.9 1
P/BV (x) 1.7
Div Yield (%) 4.2
Tier 2 banks
P/E (x) 17.1
P/BV (x) 1.3
Div Yield (%) 3.8
*Based on annualized Q3 numbers and expected dividend
BanksCurrent Price
(N)**
Target
Price (N)
Upside/
Downside (%)
Rating*
2011
P/E (x) P/BV (x) Div. Yield (%
FIRSTBANK 16.00 18.11 13.2% ACCUMULATE 9.87 1.48 5.6%
ZENITHBANK 15.99 20.24 26.6% BUY 8.73 1.31 6.3%
UBA 10.53 12.80 21.6% ACCUMULATE 10.30 1.47 5.3%
GUARANTY 19.60 20.57 4.9% NEUTRAL 11.14 2.06 4.9%
ACCESS 10.22 12.80 25.2% BUY 8.02 0.99 6.8%
IBTC 9.87 10.02 1.5% REDUCE 11.38 2.00 4.9%
SKYEBANK 9.62 10.86 12.9% ACCUMULATE 9.56 1.16 5.7%
DIAMONDBNK 8.60 10.82 25.8% BUY 8.46 1.08 6.5%
FCMB 7.98 9.50 19.0% ACCUMULATE 7.80 0.92 7.0%
20%
40%
60%
80%
100%
120%
0
20
40
60
80 NPL (N'bn) Provisions (N'bn)
Coverage (%) Our Benchmark (%)
Q310 NPLs and Provisions
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FY10 EARNINGS SEASON
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INVESTMENT RECOMMENDATIONSVetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell.Buy +25.00% expected absolute price performanceAccumulate +10.00% to +24.99% expected absolute price performanceNeutral/Hold 5.00% to +9.99% range expected absolute price performanceReduce -5.00% to +4.99% expected absolute price performanceSell -5.00% expected absolute price performance
Definition of RatingsBuy recommendation refers to stocks that are highly undervalued but with strong fundamentals and where potentialreturn in excess of or equal to 25.00% is expected to be realized between the current price and analysts targetprice.
Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potentialreturn of between 10.00% and 24.99% is expected to be realized between the current price and analysts targetprice.Neutral/Hold recommendation refers to stocks that are correctly valued with little upside potential return ofbetween 5.00% and 9.99% is expected to be realized between current price and analysts target price.Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and wherepotential return of between -5.00% and 4.99% is expected to be realized between current price and analyststarget price.Sell recommendation refers to stocks that are highly overvalued but with weak fundamentals and where potential
downside in excess of-5.00% is expected to be realized between current price and analysts target price.
Disclosures SectionAnalyst CertificationThe research analysts who prepared this report certify as follows:1.That all of the views expressed in this report articulate the research analyst(s) independent views/opinionsregarding the companies, securities, industries or markets discussed in this report.
2.That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to
the specific recommendations, estimates or opinions expressed in this report.
Other DisclosuresVetiva Capital Management Limited or any of its affiliates (collectively Vetiva) may have financial or beneficialinterest in securities or related investments discussed in this report, potentially giving rise to a conflict of interestwhich could affect the objectivity of this report. Material interests which Vetiva may have in companies or securities
discussed in this report are herein disclosed:Vetiva may own shares of the company/subject covered in this research report.Vetiva does or may seek to do business with the company/subject of this research reportVetiva may be or may seek to be a market maker for the company which is the subject of this research reportVetiva or any of its officers may be or may seek to be a director in the company which is the subject of thisresearch report
Vetiva may be likely recipient of financial or other material benefits from the company/subject of this researchreport.
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