Vetiva Research has predicted that the banking sector will remain resilient despite high inflation and currency headwinds, projecting that banks’ profits would grow marginally in spite of decline in interest income observed in the first quarter (Q1) of 2021.
The Lagos-based investment and financial advisory company also anticipated that there would be a rebound in the major component which dragged interest income in Q1, investment securities, which are expected to continue to rise through the second half (H2) of the year.
The firm stated these in its H2 2021 banking outlook titled: “No country for old policies.
Commenting, the banking analyst at Vetiva, Joshua Odebisi said: “Due to the expansionary stance of the Central Bank of Nigeria (CBN) amid high inflation, we expect the banks to continue to enjoy low interest expense, whilst interest income from fixed income (FI) securities should improve marginally to give a modest upside to net interest income in H2’21. Therefore, we anticipate a 50bps improvement in net interest margin (NIM) across our coverage in full year (FY) ’21, with the majority of those gains likely to come in the H2f of the year.”
The analyst also highlighted the impact of rising inflation and Naira devaluations on banks’ loans and advances. According to him, due to the Naira’s situation, liquidity controls have somewhat exceeded the limitations of the minimum Loan to Deposit Ratio (LDR) control, which was set in 2019, leading to an effective cash reserve ratio(CRR) of close to 40 per cent for our coverage banks.
“While some of the liquidity challenges have been addressed by the introduction of special bills, this has affected the banks’ ability to effectively deploy funds. However, due to the prioritisation of real sector lending, banks that are able to lend in those sectors of the economy will likely expand their loan books in the coming quarters,” he said.
The analyst also predicted that the CBN may review some of its restrictive policies in the FI market, as further pressure on foreign exchange (FX) reserves and a lack of foreign portfolio investor (FPI) inflows continues to pressure dollar liquidity.
Odebisi reiterated Vetiva’s stance that Nigerian banks carry great value potential in the medium and long-term.
“The significant upside in the industry, coupled with depressed valuations due to weak investor sentiment presents a significant opportunity for value investors with long-term portfolios. Also, the dividend yield potential of these companies cannot be overstated, as average dividend yield for FY’20 stood at 10 per cent across our coverage. With our positive outlook for the industry and our banks for the H2 of the year, we recommend a BUY rating on all our current banks,” the analyst stressed.