23 January 2013

Nigeria: Experts Predict Negative 2012 Financial Results for Banks

The recent rebound of the capital market as a result of investors' bets on positive full year results of banks may be cut short soon if expert's prediction that the much-awaited results will be disappointing is anything to go by.

Investors in the Nigerian equities market had enjoyed robust capital appreciation last year and the New Year owing to lower valuation of shares and expected strong corporate results by banks.

But analysts at FBN Capital has stated that banks' fourth quarter 2012 results may throw up some unwelcome surprises due to bank exposures to downstream oil and gas sector of the economy.

"However, we do not expect these surprises to be anywhere close to what we saw over the last three years. Valuation-wise, dividend yields in the banking sector are attractive; the average for our universe is around 8 per cent. Beyond the near-term results, Access Bank's acquisition of Intercontinental Bank could drive positive surprises beyond what we are modelling.

"Cost synergies are already impacting Access Bank's financials (at least N20 billion annualised). We have downgraded Access Bank to Neutral, but upgraded Stanbic IBTC Holdings shares to Neutral. We feel both names are fairly valued at current levels. Bank shares rallied strongly in 2012 but their profit multiples did not expand significantly, "they stated.

They added: "However, since the start of the year, many banks have surged, limiting the potential upside we saw coming into 2013. Having said that, we believe the dividend yields on offer by the banks is still a positive catalyst, even if only in the near term."

The experts warned that if monetary easing occurs, the banks would be negatively impacted by the decline in yields stressing that should spur some additional volumes in terms of lending.

According to the experts, "also, we are not bullish on the non-financials space because we do not see earnings growth being strong enough to set them up for a strong rally. Our concern with this group is that many of them, especially the multinationals, are trading well above their historical peak price earnings multiples.

"Nonetheless, in absolute terms, the upside potential for our banks has shrunk following the strong rally they began 2013 with. In absolute terms, while the average capital appreciation implied for our coverage universe by our price targets is 7.6 per cent, once we factor the dividend yields in, the average total return comes to 15.5 per cent."

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