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  • Fed Govt may overshoot budget deficit in 2015, say analysts

    Fed Govt may overshoot budget deficit in 2015, say analysts

    The Federal Government may overshoot its proposed budget deficit of N722 billion in 2015 given the current global crude oil price scenario and the fragility of government’s non-oil revenue mobilisation.

    Analysts at Afrinvest Securities Limited said the current scenario suggests possibility of a higher deficit than anticipated in 2015 citing the declining crude oil price and the vulnerability of the non-oil revenue mobilization.

    According to analysts, with a new floor yet to be established, there is the possibility of crude oil prices declining, which will undermine Nigeria’s budget benchmark and pose major challenge to budget performance during the year.

    Analysts noted that in the scenario that oil prices do not recover to a minimum of $65 in 2015, Nigeria’s budget benchmark price, government may incur larger deficits than the previously estimated sum of N755 billion.

    The 2015 Budget indicates net federally collectible revenue of N6.9 trillion, with a total of N3.6 trillion envisaged to fund the FGN 2015 Budget, representing about 3.4 per cent drop from N3.7 trillion for 2014 Budget. Details of aggregate budget revenue of N3.602 trillion included oil revenue of N1.92 trillion and non-oil revenues of N1.68 trillion. This represented a ratio of 53 percent oil revenues to 47 per cent non-oil revenue.

    “Whilst we acknowledge the non-oil revenue mobilization efforts presently embarked on by the government, we note that the structure of this revenue mobilisation effort is still fragile, hence will require a considerable time lag before results will be evident,” Afrinvest stated.

    Analysts noted that while the reduction in total budget expenditure from N4.7 trillion appropriated in 2014 to N4.36 trillion in 2015 reflected the decline in national revenue due to the oil slump, the proposed reduction in the fiscal expenditure is not broad based.

    According to analysts, the reduction being proposed in 2015 will only affect capital expenditure while recurrent expenditure is still on the increase.

    “With the already huge infrastructural deficit in the economy, we are of the view that 14.6 per cent allocation to capital expenditure is relatively miniscule, hence major impediment on growth and development in 2015,” analysts stated.

    Standard & Poor’s Ratings Services had in its recent report pointed out that an increasing number of sub-Saharan African sovereigns have begun accessing international debt markets. South Africa has been issuing for many years. In 2007 Ghana and Gabon also issued debt, of $750 billion and $1 billion, respectively. Senegal followed in 2009 with $500 million issuance, followed in 2011 by Nigeria, also with $500 million. In 2012, Zambia issued $750 million, while Angola issued a $1 billion structured transaction. The following year, issuance was led by Rwanda with a debut Eurobond of $400 million, followed by Ghana ($1 billion, including a $250 million buyback), Nigeria ($1 billion), and Gabon ($1.5billion). Of the sub-Saharan African sovereigns not rated by Standard & Poor’s, Namibia issued $500 million in 2011 and Tanzania issued $600 million in early 2013.

  • Expect more volatility in the stock market, say analysts

    There may be increased volatility in the stock market as portfolio and fund managers realign their portfolios toward the year-end and investors seek alternative investment options to lock in their funds.

    Analysts said the performance of the stock market in the remaining weeks of the year will be affected by the devaluation of Naira, high cost of funds and high interest rate.

    The outlook report came as the stock market lost 0.46 per cent on Monday, pushing the negative average year-to-date return at the Nigerian Stock Exchange (NSE) to -19.97 per cent.

    In their latest review, analysts at FSDH Securities Limited said the current market situation was due to investors’ apathy in the market, on account of the continued threat pose on the economy as a result of the declining oil price, the regulatory headwinds affecting the banking stocks, security challenge in the Northern part of the country affecting most of the Fast Moving Consumer Goods (FMCG) results.

    According to analysts, the fact that interest rate in the money market has been on the rise lately has also not helped the equity market.

    “We expect to see a high level of volatility in the equity market in December, as portfolio and fund managers begin to realign their portfolio to close the year. We are of the opinion that the valuations of stocks quoted on the NSE are attractive both in absolute and relative terms and has potential to attract potential investors,” analysts stated.

    They noted that a number of stocks on the NSE have good fundamentals and have prospects for growth in the medium to long-term pointing out that the market has continued to offer exceptional opportunities for medium to long-term investors.

    Analysts stated that while the equity market historically usually appreciates in December, the current negative developments on the economy may temper the historic trend.

    “Going forward, we expect some pressure on corporate earnings of companies quoted on the floor of the NSE to decline, as a result of high cost of funds, exchange rate losses, higher interest rate and inflationary pressures,” FSDH stated.

    They advised that investors should maintain a medium-to-long term view of the market noting that stocks with diversified products and business may be good choices at the moment.

    “This time may not be a good time for the speculators in the equity market,” FSDH stated.

    The report indicated that a total inflow of about N1.27 trillion is expected to hit the money market from the various government maturing securities and Federal Allocation this month while expected outflows from various sources such as government securities and foreign exchange funding are estimated at N776.83 billion, indicating a net inflow of N492.33 billion.

    The analysis does not include the possible Central Bank of Nigeria (CBN)’s interventions at the inter-bank segment of the foreign exchange market; and Nigeria National Petroleum Corporation (NNPC) withdrawals from the system which are difficult to estimate.

    “We expect that the CBN will continue to issue Nigeria Treasury Bills (NTBs) at higher yields in December. Yields are expected to increase in the month of December 2014. The increase will be driven by the following factors: declining oil price and the risk of declining revenue that it portends for the Federal Government of Nigeria (FGN), the decision of the CBN to tighten monetary policy, electioneering spending to fuel inflation, possible increase in the inflation rate from December 2014 following devaluation of the foreign exchange rate and bank’s deposit mobilization drive for the end of year,” FSDH noted.

    They however stated that that the recent quantitative easing (QE) measures of the European Central Bank (ECB) and the expansionary measures of the Peoples Bank of China (PBoC) may lead to additional inflows of investment funds to Nigeria in the form of Foreign PortfolioInvestments (FPIs) thus moderating yields.

    Analysts said fund managers may move funds to the longer-tenored fixed income securities while placement of funds with banks to earn attractive yields will be a good strategy.

  • Analysts’ consensus sees values in Skye Bank

    Analysts’ consensus sees values in Skye Bank

    Pundits are unanimous that the recent acquisition of Mainstreet Bank Limited by Skye Bank Plc holds significant positive prospects for the bank. Capital market editor, Taofik Salako  reports that the consensus of most analysts can build considerable momentum for the bank as it progresses with the post-acquisition processes

    There is a consensus hanging in the air; in the financial markets; that Skye Bank Plc is a bank to watch. As details unfold about the recent acquisition of Mainstreet Bank Limited by Skye Bank, immediate analysts’ reactions and evaluations appear to be generally positive. Most wager that the acquisition is a game-changer and, if executed with the same crispness and swiftness that characterized the transaction, will create significant values for all stakeholders. Across the broad spectrum of investment pundits – Nigerian and foreign, the inference is positive for Skye Bank; the acquisition will leapfrog the bank to the first-tier level of the topmost players in the Nigerian banking industry and enhance both dividend and capital appreciation to shareholders. Already ranked, prior to the acquisition, as one of the eight systemically important banks, a euphemism for Nigeria’s “too-big-to-fail” financial institutions, Skye Bank is expected to move the ladder up in all measurable indices – size, spread, strength, resistance,  profitability and returns.

    Skye Bank had on October 31 paid the 80 per cent balance for the full acquisition of the entire issued shares of Mainstreet Bank to the Asset Management Corporation of Nigeria (AMCON), thus making Skye Bank the new owner of Mainstreet Bank. Confirming the depth of its balance sheet, Skye Bank paid some N100 billion to AMCON on Friday October 31 as balance for the acquisition, which was valued at some N120 billion. The deadline for the payment of the balance was November 3, 2014. It had earlier on October 9 paid the mandatory deposit of 20 per cent for the acquisition of Mainstreet Bank. The payment of the 80 per cent balance to AMCON wholly fulfilled the terms of the Share Sale and Purchase Agreement earlier signed by both AMCON and Skye Bank and now put the latter in ownership  of Mainstreet Bank.

    Kato Mukuru, Partner and Head of Equity Research at Exotix Partners LLP, thinks the deal is a major positive step for Skye Bank.

    The Mainstreet Bank’s transaction was a highly competitive sale process, a transaction that was seen by many as a test  not only for AMCON but also the integrity and depth of the Nigerian financial services industry. The largest of the three acquired banks by AMCON, Mainstreet Bank emerged from the rubbles of Afribank Nigeria Plc, a quoted bank that was once Nigeria’s fourth largest bank. The rigorous and competitive bidding process involved 25 Nigerian and foreign bidders and was coordinated for AMCON by Barclays Africa Group Limited and Afrinvest West Africa Limited as Financial Advisers and Banwo & Ighodalo as Legal Advisers. In the end, Skye Bank Plc, Cedar One Investment Partners Limited and Fidelity Bank Plc emerged as preferred bidder, first and second reserve bidders respectively. No one has raised a finger on the transaction process, it was a transaction adjudged by many as transparent and credible.

    Mukuru, who oversees equity research for Exotix, a global finance and investment firm with offices in major global financial centres and significant imprints in Africa, noted that while it may be too early to fully review the financial impact of the transaction, there is no doubt that the  acquisition represented a major leap for Skye Bank. Exotix coordinates its global operations through five major offices in London, New York, Lagos, Dubai and Nairobi.

    “While we do not have enough detail on the transaction to comment on the financial impact, but I can safely say that this deal is nothing short of transformational for Skye Bank and if executed well, it could put them in a position to enter the elite group of tier 1 banks,” said Mukuru in a response to email enquiry on analyst’s view of the transaction.

    Femi Ademola, head of research and intelligence at BGL Plc, a top Lagos-based investment firm, shared the positive sentiment citing the potential gains in terms of spread and reach and deposit assets.

    “I think the acquisition is very positive for Skye Bank Plc,” Ademola said.

    Sadiq Waziri, group head of  Research at Lead Capital Plc; Sewa Wusu, head of  Research and  Investment  Advisory at Sterling Capital Markets and Akinkunmi Popoola, head of  Trade  Execution at Securities Africa Financial Limited among others, also shared the same positive outlook.

    The potential impact will be big on Skye Bank’s reach and assets. The acquisition leapfrogged Skye Bank as one of the biggest and largest banks in the country in terms of branch network. Mainstreet Bank has nine subsidiaries and a large distribution network comprising of 201 branches across 35 out of 36 states in Nigeria and the Federal Capital Territory, Abuja. It equally has nine cash Centres and 205 Automated Teller Machines (ATMs).

    “Scale is critical to banking in Nigeria and we all know that this acquisition fills a major regional gap – the North, in Skye Bank’s current distribution,” said Mukuru.

    Skye Bank, with dominant operations in the Southwest, is also banking on Mainstreet Bank to deepen its penetration of the South-East and South-South regions where it is currently less represented. Some 26 per cent or 54 branches of Mainstreet Bank’s network are located in the two regions. These two regions also accounted for 28 per cent of Mainstreet Bank’s over 1.9 million customers, second only to Lagos with 37 per cent.

    With smooth and seamless integration, Skye Bank will be able to make valuable in-roads into these two regions without the need to incur huge expenditure while the acquisition would bring valuable concurrence and synergies from the mutual focus areas of commercial and retail banking of the two entities in a larger Skye Bank. Skye Bank focuses on retail and commercial banking, also the main focus areas of Mainstreet Bank.

    According to Waziri, the most significant gains to Skye Bank would come in terms of the expanded branch network and the resultant increase in customers, particularly savings and current account depositors, which are the cheapest form of deposits. “Mainstreet Bank was formally Afribank, which was established in 1959; the bank is endowed with a lot physical assets – properties in prime areas, which Skye Bank would benefit from,” Waziri said.

    Latest audited report and accounts of Mainstreet Bank for the year ended December 31, 2013 showed that retail and commercial banking contributed 78 per cent, 36 percent, and 18 per cent of total deposits, total loans and profit before tax respectively. Also, Mainstreet Bank’s savings and demand deposits accounted for 21 per cent and 43 per cent of deposit mix, which also demonstrated its focus on these two segments. A second generation leader, Mainstreet Bank has a large pool of loyal institutional and corporate customers, which in spite of its status as an AMCON-owned bank, ensures that the bank’s retained almost its two million customers after the takeover.

    Also, Mainstreet Bank Limited has a history of successfully managing agricultural loans, with agric loans accounting for 12.6 per cent and 16.9 per cent of its loan portfolio in 2012 and 2013, second only to ‘general’ sector. Analysts have said Mainstreet Bank’s expertise in managing agric loans made its non-performing loan ratio to be very negligible at 0.01 per cent, where Skye Bank saw a significant opportunity to improve its expertise in this area, and therefore raise its market share in the agriculture sector. This will position Skye Bank very strategically to partner with and participate in the Federal Government’s short and medium term planned strategic investment and budgetary allocation to the agriculture sector.

    Popoola pointed out that the bigger branch network would enable Skye Bank to mobilize more low cost deposits and enhance its lending capacity. This will translate to improvement in loan-deposit ratio as the Bank can rely more on its own deposits to grant loans to its customers. “This is helpful at a time like this when liquidity of banks generally is threatened by the raising of Cash Reserve Requirement (CRR) on public funds by the Central Bank of Nigeria (CBN),” Popoola said.

    While some analysts would like to be availed details of the transaction, which at this time the institution is still not allowed to make public by reason of restrictions under the Purchase Agreement with AMCON, there is considerable optimism that the acquisition would improve the fundamentals of the bank. Wusu said the acquisition would improve the operational performance of the bank and as such enhance direct and indirect returns to shareholders.

    According to him, the acquisition is a game-changer for Skye Bank given the possible synergies and the impact on the balance sheet and profitability of the bank. The acquisition will increase the bank’s market position in the banking industry and at the stock market.

    “The acquisition will improve the bank’s capital adequacy and liquidity ratios since most of the Mainstreet Bank’s assets are invested in very liquid assets. Consequently, it is expected that the acquisition will also help to boost the bank’s profitability, going forward,” Ademola said.

    Besides driving growth with its inorganic strategy, Skye Bank, organically, has been witnessing a notable upturn in its performance.  The  Bank recorded a pre-tax profit of N12.3 billion on a top-line of N97.13 billion in the third quarter. “Investors and shareholders should expect to see value creation in form of capital appreciation and improved dividend because ultimately the bigger Skye Bank should be able to post decent profit going forward. The banking sector will also benefit as the development is expected to emphasize the banking sector as the preferred sector by prospective investors,” Popoola said. The benefit, he said, will also spread to the larger Nigerian capital market in terms of trading activity and capitalisation.

    The potential impact, analysts however noted, will depend on the execution strategy for the acquisition and integration. With the management of Skye Bank still holding some details to its chest pending the completion of the post-acquisition regulatory process, analysts said the degree of uncertainty on some issues could be a temporary dampener on the stock. Ademola noted that the bank needs to make public its strategy to appropriate value from the acquisition. This strategy, according to Popoola, should include cost control measures as bigger branch network is sometimes associated with increased overheads which can erode the profit. “But how all these transform Skye Bank will depend on execution,” said Mukuru.

    But history and experience are on the side of Skye Bank. There is a deep in-house experience on seamless integration and post-acquisition transition of mergers and acquisitions. Skye Bank emerged from the merger and integration of five banks in 2006, following the first phase of the banking industry consolidation. It intends to harness this wealth of experience from earlier successful mergers and acquisitions to drive efficiency, increase market share and ultimately ramp up stakeholder value from the acquisition of Mainstreet Bank.  Timothy Oguntayo, who took over in the second quarter as the  Group Managing Director, has been with the bank since the 2006 consolidation and had directly anchored the consolidation exercise at the time. He is reputed as a dependable multi-skilled financier and financial strategist.

    “Timothy Oguntayo has got all round competence both in commercial banking and investment  banking. He started his career in United Bank for Africa (UBA) so he has strong commercial background. He had worked at Prudent Bank. He has the thinking of an investment banker and the skills of a commercial banker and nothing can be better than that. He has sound judgement which is key for decision making,” said Kehinde Durosinmi-Etti, immediate past  Group Managing Director of Skye Bank.

    While the management of the bank has kept itself to general statement on the import of the acquisition, obviously due to regulations and ongoing post-acquisition process, the acquisition dovetailed into the bank’s medium and long-term growth strategy, which had earlier been made public. This corroborated mManagement’s assertion that the acquisition was a deliberate strategy and it was well prepared to extract the most significant benefits from the transaction.

    In 2013, the bank had outlined a three-year short-term plan that is expected to double its balance sheet and customer deposits by the end of the plan in 2015. The bank is also expected to significantly improve its profitability in tandem with the targets for total assets and customer deposit.  The bank then retooled its growth model into a more assertive and forward-looking option that sought to consolidate its historical value-based organic growth strategy with expansionary and competitive verve with a view to leapfrog and sustain the bank into a top tier bank within the medium to long term. Focused on internally-driven value creation, Skye Bank had raised comparatively lower capital and did not make any acquisition in the rush for large capital and acquisitions by several banks.

    Thus, with this new growth model, while the bank is expected to drive growth largely internally through increased capitalisation and market-facing initiatives, it would also seek to acquire value-adding commercial banking assets that could leverage its balance sheet, spread and customer base. Thus, the acquisition of Mainstreet Bank fits perfectly into Skye Bank’s growth strategy.

    “In 2014, the Board assures shareholders that all efforts would continue toward implementing the bank’s plans in the medium term and well into the future. The quest to provide the most efficient customer service, as espoused in the service charter, remains unchanged,” Olatunde Ayeni, Chairman, Skye Bank Plc, had said at the recent General Meeting of shareholders where N3.96 billion was distributed as cash dividends.

    The story of the acquisition may not now be one that is fully told, but most will wager that the acquisition of Mainstreet Bank is a masterstroke from Skye Bank; that will change the face and phase of the Nigerian banking industry. Investors and other stakeholders have so much to look forward to as the integration gathers pace and the value-additions become increasingly evident.

     

     

  • Analysts see inflationary rates moderating at 8.3%

    INFLATION for last month stood at 8.3percent year/year, a touch softer than the 8.4 per cent previously forecast by analysts.

    Managing Director, Head, Africa Macro Global Research, Razia Khan, said despite the fifth consecutive yearly rise in headline inflation, the overall detail suggests that inflationary pressures may be moderating.

    To her, given the overlap between Ramadan and July, food prices did not appear especially pressured.

    “This is not atypical for Nigeria which tends to buck the global trend in this respect.  Food prices increased to 9.9 per cent year/year in July from 9.8 per cent in June.  In month/month terms however, food prices were up 0.8 per cent month/month – the same rate of change in food prices seen for four consecutive months.  There was little sign of any heightened pressure in July,” she wrote in an emailed report.

    Continuing, Khan said there are some signs that core inflation is moderating.  “Core inflation eased to 7.1 per cent year/year in July, rising only 0.2 per cent month/month from 8.1 per cent year/year and 0.7 m per cent month/month a month prior,” she said.

    She said the data was due to slower price increases in a range of items – including clothing and footwear, housing, water and electricity and gas and other fuel.

    In all, the m/m change in headline inflation has slowed – to 0.65 per cent m/m in July, from 0.77 per cent in June.  With 12 months inflation running at 8.0 per cent in July, we see little change in policy soon, despite still-liquid market conditions.

    Also, Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said whilst the incremental rise is marginal, the cumulative increase could become a cause for monetary policy concern. “In February 2014, the year on year retail price inflation was 7.7 per cent and this will now peak at 8.3 per cent, up 0.6 per cent. Even though it is within the six to nine per cent target range, it will only be 0.7 per cent lower than the ceiling,” he said.

    Rewane said the trend will give the CBN Governor, Godwin Emefiele a reason to look at the close relationship between money supply growth and the inflation. “Emefiele will also try to decompose money supply into the high powered component and other aggregates. The rate of inflation is already becoming part of the political agenda in what is likely to be a keenly contested election,” he said.

    He said the CBN is watching the inflation rate closely because rising inflation will seriously undermine the key objective of maintaining the value of the naira at current levels. “The new CBN Governor has staked his reputation on his mission to bring down interest rates and thus impact employment indirectly. An increase in the inflation rate is likely to make the reduction of interest rates less imperative,” he said.

    He said that in the rest of Sub Saharan Africa, the countries that are facing increasing inflationary pressures are Ghana (15 per cent) and South Africa (6.6 per cent). Ghana has taken economically draconian measures like sharply reducing subsidies on petroleum and power. It has finally succumbed to reality by approaching the International Monetary Fund (IMF) for a programme to address persistent pressure on the external balance.

     

     

  • Analysts back new capital for BDCs

    Financial market analysts have endorsed the central bank’s new capital requirements for bureaux de change (BDCs).

    According to them, the policy would help in bridging the gap between the official market and other segments of the foreign exchange (forex) market, especially the BDCs. It is also expected to strengthen the naira and halt the seeming dollarisation of the economy.
    Last week, Central Bank of Nigeria (CBN) announced a minimum capital requirement of N35 million for BDCs, up from N10 million. It also reviewed the mandatory cautionary deposit for BDCs upward to N35 million.

    The money shall be deposited in a non-interest yielding account in the CBN after the grant of approval-in-principle.

    But, the House of Representatives kicked against the policy, and invited the CBN Governor, Mr Godwin Emefiele, to appear before its Banking and Currency Committee to provide a “full brief on the policy somersault”.

    To the Head of Research at Sterling Capital Limited, Sewa Wusu, the policy would help in sanitising the BDC sub-sector.

    “What the CBN is trying to do is to monitor and ascertain the legitimate demand in the BDC segment so that they will not be spending so much in defending the naira. The premium between the BDC and official rate is still very wide and the CBN wants to bridge the gap and curtail the excesses of operators. Also, the CBN is being proactive in monitoring money laundering ahead of the 2015 elections,” Wusu explained.

    He noted that the move by the regulator clearly shows its resolve to defend the naira at all cost, saying the depletion of the forex reserves called for serious concern by all stakeholders.

    “If our forex reserves continue to come down, the international rating agencies may downgrade Nigeria’s rating which may affect us negatively,” he added.
    The Head of Investment Research at Afrinvest Securities Limited, Ayodeji Ebo, said the policy was long over due, describing it as a welcome development. To him, the move by the CBN will help in curbing infractions at the BDC segment. “In view of the capital requirement, it will reduce the number of BDCs. When you look at how the spread between the BDC and interbank has narrowed down, with the policy it is going to reduce further,” he said.

  • Analysts express fears over N305b police pension

    Financial market analysts have called for a rethink of the planned transfer of N305 billion pension savings of the men and officers of the Nigeria Police Force (NPF) from various pension fund administrators (PFAs) to a proposed government-owned pension administrator.

    A financial analyst, Mr Ayodele Adekunle, in a statement, cautioned against the move by the  National Pension Commission (Pencom) to move  the N305 billion Police pension to the  proposed NPF Pensions Limited noting that such transfer runs contrary to the letters and spirit of the Pension Reform Act 2004 (PRA) and could have unintended negative consequences.

    According to him, the Federal Government should reconsider the move because it does not only pose a threat to payment of men and officers of the NPF but  also  moving the funds from existing PFAs contravenes the extant law on pension operations.

    “We all are living witnesses to the stories about police pensions in this country and the N305 billion has professionally been managed under the pension reform over the years. Changing the status quo has so many risks and I believe the government should consider the demerits of this move before taking further action,” Adekunle said.

    He noted that section 11(2) of the PRA 2004 gives every contributor the right to choose any PFA pointing out that the move by Pencom contravenes this provision.

    “Apart from the fact that moving the funds contravenes that section of PRA 2004, I am suspecting some foul play. The regulator is saying that after the transfer, the police personnel will have the freedom to transfer to their PFA of their choice after two years. To me, there is ulterior motive in this position. Instead of transferring all the pension to a new PFA, the opportunity should be given to  the police personnel right from  day one so that they decide which PFA to use  rather than compelling them to move to a new PFA and after two years they will transfer from the new PFA to any other one of their choice. This will not only be cumbersome but it is also doubtful,” Adekunle stated.

    He urged the government to re-evaluate the implications of the plan for the pension fund industry and future of the personnel of the NPF.

    Other stakeholders in the capital market and pension industry had earlier said the withdrawal may have unintended negative influence on the capital market where the large chunk of the funds are invested while the lack of independence and competition could thwart the laudable objectives of pension management.

    Stakeholders said the negative spillovers may also affect the Nigerian capital market as PFAs would have to adjust their portfolios to meet the exigencies of transfers.

    They urged the government to reconsider the idea and allow independent PFAs to continue to manage Police pension assets while the NPF concentrates on its core duty of protecting the citizenry.

    However, Pencom has assured that the transfer would be temporary and it would not have any negative consequence on the industry.

    Spokesman for Pencom, Mr. Emeka Onuora, said that the licensing of  NPF Pensions Limited to manage the Police pension savings pending the opening of the transfer window would not pose any threat whatsoever.

  • Analysts see drop in May inflation, Naira value

    Analysts see drop in May inflation, Naira value

    •Expect interest rate to remain 12% 

     

    Analysts at Financial Derivatives Company (FDC) Limited see May inflation declining to 8.98 per cent from 9.1 per cent recorded last April.

    They forecast the Monetary Policy Committee (MPC) retaining the benchmark interest rate (the Monetary Policy Rate, which determines other interest rates in the economy) that remained unchanged for a 10th consecutive meeting at 12 per cent.

    The Managing Director of FDC, Bismark Rewane, said in a report that last month’s inflation projection is supported by the slight moderation in the food index of the  firm’s Lagos urban inflation and associated high prices in the base period of May last year.

    He explained that FDC’s Lagos urban price index moderated for the third consecutive month by 0.46 per cent to 10.83 per cent, from 11.29 per cent in April.

    Also, the urban index eased as a result of the decline in both the food and non-food indexes while prices of items such as rice, guinea corn, wheat, salt, cereals, and vegetable leaves declined, leading to a 0.08 per cent moderation in food index.

    He noted that the non-food index also declined by 0.35 per cent to 8.73 per cent last month due to a reduction in air fares, fall in cost of insecticides, men’s clothing and toiletries.

    “We anticipate that the headline inflation will remain in the single digit band before the next MPC meeting in July. After the last MPC meeting, the CBN Governor suggested the need for a tight monetary policy and highlighted the current risks to inflation.

    Recently, the Governor of the CBN, Mallam Sanusi Lamido Sanusi, hinted on a possible increase in the cash reserve requirement (CRR) if fiscal spending continues to increase,” he said.

    The FDC’s expectation is that the nominal interest rates in the economy will trend within the two per cent band of the benchmark policy rate until the next MPC meeting in July. However, movement in the government’s spending in coming days will foretell the direction the MPC will lean to when taking position in July, he said.

    The expert explained that the probability for an accommodative monetary policy is reduced by the continued increase in government’s spending, which it did not see dropping due to the approaching election season. Also, one of the major concerns of the MPC is its inability to discern if the level of inflation in the economy is a trend or a blip. Other concerns of the MPC, he said, include increased fiscal expenditure and naira stability.

    “In addition to the above, our forecast of a flat rate of inflation in May makes the chances for an accommodative monetary policy dim. Notwithstanding, our analysis suggests that the current inflation rate is more of a trend rather than a blip. Hence, we do not expect the MPC to change its monetary policy strategy as the CBN is poised to maintaining economic, monetary and exchange rate stability,” he said.

    Rewane also explained that inflation could impact the bond market based on CBN’s response through the use of monetary policy tools at its disposal. The second is more subtle and insidious to the portfolio returns of bond investors’ overtime. This is the effect of the lag between the nominal return and the real return provided by a bond.

    “Given our forecast and the likely monetary policy response, the bond market is expected to be negatively impacted. Year-to-Date, the average bond yields have declined 84 basis points to 11.11 per cent per annum, indicating the impact of the tight monetary policy,” he said.

    The FDC boss also said the naira is likely to depreciate further against the dollar due to the increasing demand for the dollar. Growing government spending and declining foreign reserves levels are other pointers to the naira’s fall adding that in May, the naira was stable only because of the CBN’s intervention in the forex market.

    “Evidently, our analysis on the true value of the naira against the dollar reveals the naira is currently overvalued by 13.95 per cent.  We therefore note that the CBN intervention may become unsustainable if government spending continues to go up. This is likely to prompt the apex bank to allow the naira to find its true value,” he said.

    He opined that the eventual depreciation of the naira would translate to increased cost of imports, reserves depletion and increased fiscal spending. This will immediate translate to higher cost of goods and services, hence higher inflation.

     

     

     

  • Banking stocks may outperform other equities, say analysts

    Banking stocks may outperform other equities, say analysts

    • Shift in MPR unlikely in Q2

    Banking stocks have been tipped to outperform other equities quoted at the Nigerian Stock Exchange (NSE), analysts at Cordros Capital have forecast.

    In a 2013 forecast released at the weekend, the firm also said emerging markets equities look attractive when compared with those of developed markets. The Cordos Capital forecast said a long-term view of emerging markets remains positive, especially with a growing middle class, pent-up consumer demand and young populations. The market, they said, is unmatched in their prospective return on investment.

    “We maintain our bullish stance on Nigerian equities, a view which has played out very well in 2012 amid an ongoing surge in the All Share Index. We believe that banks will continue to lead the way, with the consumer and construction industries poised for greater mark,” it said.

    The equities market made a sluggish start to 2012 following the bearish trend fuelled by profit warnings issued by United Bank for Africa, Diamond Bank and First City Monument Bank (FCMB) due to material write-downs on their non-performing loans. However, the equities market performed well in 2012 with a total return of 35 per cent.

    Market performance, they said, was impacted by the sustained investors confidence, economic growth trend, stable naira, impressive corporate earnings, robust investment horizon, attractive valuation of equities, increased activity of foreign portfolio managers, regulatory interventions, and recovery in the banking sector.

    Besides, they said the big shifts in monetary policy is unlikely in the first half of 2013, adding that in response to the global economic crisis, the Central Bank of Nigeria (CBN) pursued measures in 2009 and 2010 to promote growth and financial stability.

    However, in 2011 and 2012, the CBN tightened monetary policy to mop-up excess liquidity in the banking system and ward off inflationary pressures.The market pressures were stemming from high fiscal spending, the implementation of a new minimum wage and the injection of funds into the bank system through the purchase of non-performing loans through bonds issued by the Asset Management Corporation of Nigeria (AMCON).

    According to the firm, the Monetary Policy Rate (MPR), which was 6.25 per cent in September 2010, increased six times in 2011, to reach 12 per cent in December, 2011. The rate remained unchanged at 12 per cent in 2012. Similarly, the Cash Reserve Ratio (CRR) was increased steadily from one per cent in March to eight per cent in December 2011.

    It said a combination of renewed optimism over the state of the global economy, apparent easing of tension in Eurozone crisis, and aversion of the United States’ “fiscal cliff” suggests that interest ratecuts may be held back until the latter part of 2013.

    ”Our expectation is further premised on the fact that inflation remains elevated. However, we believe once inflation falls to within target, monetary policy loosening could come to the fore, leading to a 100 basis points cut to 11 per cent. They also projected that increased interest in the equities market would be sustained towards end of first quarter as investors continue to position for the full year results ahead,” it added.

    The analysts also said there is possibility that full deregulation of downstream oil sector and signing into law the Petroleum industry Bill will impact the oil and gas sector, leading to capital raising.