• UBA tops most attractive list
Most Nigerian banks are poised to deliver better returns for the year ending December 31, 2012 following above-average performances in the third quarter, Renaissance Capital has said.
In an industry-wide earnings’ review and projections, analysts at Renaissance Capital said the third quarter earnings for banks provided relatively reliable window to preview possible earnings and returns for the full year.
The Nigerian banks’ earnings report noted that though the fourth quarter had gained notoriety for last-minute adjustments to provisions charges, operating costs and tax rates, the risk of a repeat of such substantial provisions and adjustments that characterized the fourth quarter of 2011 is negligible under the current scenario.
On the basis of this, analysts at Renaissance Capital reviewed upward 2012 full-year forecasts for several banks while adjusting their investment values for most of the banks.
The report singled out United Bank for Africa (UBA) Plc as the most attractive banking stock with the highest potential for capital appreciation, based on the strong fundamentals recorded so far.
The report indicated that while most banks have been strong performers in terms of share prices, there are still significant upside potential for capital appreciation.
According to the report, from a price-performance perspective, what the banks’ share prices have done was merely to make up for some of the declines in 2011.
“On a two-year view, the price performances of most of these stocks are still negative, with only Guaranty Trust Bank, Zenith Bank and First Bank in positive territory. Given that valuations – in terms of both price-earnings and price-book value ratios, – are not yet stretched, in our view -although not as low as they were at the beginning of the year, we believe there is scope for further outperformance in the sector,” Renaissance stated.
The top picks among the banking stocks, according to the report, included UBA, Zenith Bank and Skye Bank. UBA is rated with the highest possible capital appreciation of 59 per cent on current market consideration. Analysts picked Zenith Bank and Skye Bank with upside potential of 21 per cent and 31 per cent ahead of Access Bank, citing concerns that “risks to slippage on the cost reduction front are much higher” for Access Bank.
“This has been a year of continual upgrades for UBA. We placed a buy rating on this stock beginning of the year under very conservative assumptions, in our view. At each reporting period the bank has outperformed our expectations. The nine-month profit before tax of N45 billion and profit after tax of N38 billion represented 91 per cent and 100 per cent of our full year 2012 forecasts, respectively,” Renaissance stated.
According to analysts, UBA has fared well in terms of cost management citing both the operating costs and impairment costs.
“What it has done very well, in our view, is to reduce costs. We applaud the closure of excess branches and the slowdown in the rate of expansion in some of its African subsidiaries. The clean-out of the book has also been a boost this year – despite a 10 per cent provision on the Air Nigeria loan, UBA’s impairment charges are still running well below average, at 0.42 per cent,” analysts said.
With these, Renaissance Capital upgraded its 2012 full-year forecasts for UBA by 22 per cent and followed this with increase of 19 per cent for 2013.
Even with the upgrade, analysts said they believed UBA could still beat their full-year forecasts for 2012 if it successful resolves the indebtedness of Air Nigeria in the fourth quarter.
Analysts said they now expected UBA to post profit before tax of about N56 billion and profit after tax of N46 billion for 2012. They subsequently raised target price for UBA from previous target of N5.7 to N7.5 per share.
“UBA has been the best-performing Tier-1 bank in our universe in terms of share-price performance, rebounding from a poor year in full-year 2011. We retain our buy rating,” the report stated.
Renaissance Capital said the banking industry has generally performed well pointing out that four banks reported numbers that were better than expected, four were in line with expectations while only two banks fell below expectations.
It noted that banks have continued to manage well their non-performing loans with most banks reporting non-performing loan ratios of below 6.0 per cent.
Analysts said they believed the loan books as they were by the third quarter represented probable assumptions for the year noting that there were no strong indications of any notable clean-up that could vitiate the assumption.
On loan growth, the report indicated that Tier-2 banks have generally outpaced the Tier-1 banks in loan growth so far this year with the major outperformers being First Bank and Diamond Bank, with growth of 22 per cent and 38 per cent respectively.
It noted that larger and more liquid banks with large portfolios of fixed-income securities would benefit from lower taxes following the inclusion of tax exemptions on fixed-income securities in the federal government’s official gazette in December 2011. These multi-year exemptions effectively kicked in this year.
The Nation had earlier reported that Nigerian banks grossed N1.85 trillion in the third quarter, a hefty 59.6 per cent on N1.16 trillion recorded in the second quarter. However, banks’ top-line earnings were still 33.2 per cent short of the industry’s net assets.
The Nation’s Intelligence Report had shown that banks’ net earnings improved by 45.4 per cent while industry’s shareholders’ funds increased slightly by 6.7 per cent. The report covered all quoted banks, excluding the troubled Wema Bank, which has been in default of periodic release of results. The least impact bank, Wema Bank’s results will not change the industry’s figures.
Industry’s average return on equity improved from 10.05 per cent in the second quarter to 13.7 per cent in the third quarter, a double-digit position that underlines the fundamental attractiveness of banks’ shares. Six banks performed above industry’s average return on equity.
Notwithstanding the substantial growth in gross earnings, banks were still relatively underperforming their innate capability with top-line earnings just two-thirds of shareholders’ funds.
Total industry’s profit after tax stood at N378.52 billion while shareholders’ funds stood at N2.76 trillion compared with N260.27 trillion and N2.59 trillion recorded in the second quarter.
Nearly all banks witnessed increase in key performance indices of top-line earnings, net earnings and net assets but the income structure and bottom-line still reflected the overt caution in an industry just recovering from a devastating assets bubbles and balance sheet impairment.
Banks’ chiefs were also optimistic that the third quarter performance could be sustained through the year. On the back of the bank’s 430 per cent growth in net profit, Group Managing Director, UBA Plc, Mr Phillips Oduoza, said the bank would continue to pursue its unique strategy of maintaining diversified business in terms of geography and earnings mix.
He noted that the bank’s Nigerian operations recorded an impressive growth in deposits and still kept funding costs relatively low despite a spike in interest rates during the third quarter.
“There are increased contributions across key financial parameters in our pan-African business. In all, UBA remains committed to achieving its targets for 2012 and especially its long term aspirations,” Oduoza assured the shareholders.
