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Banks’ Loan Growth Stalls At 20% Average Half Year 2016

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Posted: Sep 12, 2016 at 6:09 am   /   by   /   comments (0)

Kirk Leigh

Lagos – Banks’ loan growth remained subdued at an average of 20 percent in the first half of 2016 on weak naira post-devaluation, according to Renaissance Capital (Rencap).

In a report released over the weekend, Rencap stated that loan growth in the industry might likely remain subdued in the remaining part of the year.

The report specifically indicated that the banks under coverage, except for Stanbic IBTC and Skye that are yet to release their results due to regulatory issues, had varying loan growth levels with UBA, Fidelity Bank and Diamond Bank having the highest growth rates.

“Owing to the impact of the naira devaluation year to date, loan growth in 1H16 averaged 20% for the banks in our coverage universe. When we adjust for naira weakness, real loan growth averaged 2.8%.

“Real loan growth was highest at UBA, Fidelity Bank and Diamond Bank. They recorded real loan growth of 9.0%, 7.4% and 7.0%, respectively, as at 1H16,” the report stated.

Independent gathered that banks are likely to pin their loan portfolios growth on the devaluation policy or market value of the national currency.

“Real loan growth will likely remain subdued in this operating environment, and any loan growth that management teams are guiding for is based largely on the impact of the naira devaluation,” the analysts at Rencap stated, adding that following inflation of the oil and gas book post-devaluation, “total oil and gas exposure increased to 29% of the total loan book in 1H16 from 26% in 1Q16. “Manufacturing and general commerce were the two other sectors with the highest exposure, representing 12% and 9% of loan book, respectively, as at 1H16.”

The report flags the deteriorating situation of non-performing loans in the industry while pinning most of the set back on exposure to the oil and gas sector, which has suffered massively from falling prices and that the problem has persisted despite several rounds of loan restructuring by banks.

“The banks have restructured a significant portion of their upstream oil and gas exposures. However, it is clear to us that overall weakness continues to weigh on the banking sector – the average NPL ratio deteriorated to 6.4% in 1H16 from 5.9% in 1Q16 and 5.3% in FY15.

“We also saw an increase in impairment charges across the board, with total impairments up 297% QoQ and 131% YoY on average. Consequently, average CoR increased to 3.1% in 1H16 vs 1.4% in 1Q16 and 2.4% in FY15,” the analysts posited.

According to the report, the average exposure to oil and gas was 29 percent in the review period, with FirstBank having the highest exposure of 42 percent, followed by Diamond Bank at 39. GTBank followed with 36 percent, while Access and FCMB followed with 27 percent. Fidelity, UBA and Zenith Bank had 25, 22 and 20 percent, respectively.

Given the dire situation, which is exacerbated by the oil price rise, the analysts highlighted that investors are pondering two key questions: “At what point will the banks start to feel the pain and how quickly will they classify these exposures?”

The report equally foregrounds market factors that are likely to favour specific banks including interest rates and revaluation gains presented by a devalued naira.

“Our preference in the Nigerian banking space continues to lie in the tier one space. GTBank is our top pick based on fundamentals. We think GTBank will be a net beneficiary of a higher interest rate environment, and we expect more revaluation gains in 2H16. We also have a buy rating on United Bank for Africa (UBA), Access Bank and Zenith Bank.

“From a valuation standpoint, we believe UBA currently offers significant upside potential of 116%, and is currently trading on P/B multiples of 0.4x for both FY16E and FY17E, on our estimates. Access Bank is trading at similar levels, with a P/B multiple of 0.4x and 0.3x for FY16E and FY17E, respectively. Zenith Bank is trading at a higher P/B multiple of 0.7x for FY16E and FY17E, on our numbers.”

Meanwhile, the report noted that there was an increase in impairment charges across board, with total impairments up 297% quarter-on-quarter (QoQ) and 131% year-on-year on average.

“Across the sector, the growth in impairments was driven by the following factors: Banks are required to make a 2% general provisioning on their performing loan book and this required provision was automatically inflated following the naira devaluation.

“Consequently, average cost of revenue (CoR) increased to 3.1% in 1H16 vs 1.4% in 1Q16 and 2.4% in FY15. CoR of 6.5% at FBNH, 5.0% at GTBank, and 4.2% at FCMB were the highest of our coverage universe.”