Vetiva Research - FY'10 Earnings Season_Are Banks Still In-The-Money

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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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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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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DisclaimerThis research report is based on public information which the research analyst(s) consider credible and reliable.Facts and views presented in this material have not been reviewed by, and may not reflect information known to,professionals in other business areas of Vetiva, including the investment banking team, as Vetiva has establishedinformation barriers between its Research team and certain business groups. Whilst reasonablecare has been

taken in preparing this document, no responsibility or liability is accepted either by Vetiva, its officers or any of itsemployees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairnessor completeness of the information contained in this report as it has not been verified by the research analyst(s)involved or the companies whose securities have been referred to except as otherwise disclosed. Neither Vetiva norany of its officers or employees including the research analyst (s) warrant or represent the accuracy orcompleteness of information set out in this report. Any ratings, forecasts, estimates and opinions set forth in thisreport constitute the analyst(s) position as at the date of this report and may not necessarily be so after the reportdate as they are subject to change without notice. It is also instructive to note that a companys past performanceis not necessarily indicative of its future performance as estimates are based on assumptions that may or may notbe realized.The value, price or income from investments mentioned in this report may fall as well as rise due to economicconditions, industry cycles, market indices, operational or financial conditions of companies or other factors. Thus,Vetiva and its officers and employees shall not accept liability for any loss arising from the use of this report or itscontents in making investment decisions or recommendations.

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express any legal conclusion, opinion or advice. Information relating to the tax status of companies whosesecurities are discussed in this report is not intended to provide tax advice or to be used by anyone to provide taxadvice. By accepting this research report, you agree to be bound by the foregoing limitations.Vetiva Capital Management Limited is registered with the Securities & Exchange Commission to conduct FinancialAdvisory, Fund/Portfolio Management, and Trusteeship business in Nigeria. This document is for informationpurposes only and for private circulation. No portion of this document may be reprinted, sold or redistributedwithout the written consent of Vetiva Capital Management Limited. Vetiva research report is disseminated andavailable primarily electronically, and, in some cases, in printed form.

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Vetiva Research - FY'10 Earnings Season_Are Banks Still In-The-Money

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