• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
 
Africa Equity Research
12 May 2008
Nigerian Banks
Fasten your seatbelts, high growth and bumpy rideahead; initiating coverage of the sector
BanksAndrew Cuffe
AC
(27-11) 507-0364andrew.j.cuffe@jpmorgan.com
See page 152 for analyst certification and important disclosures, including investment banking relationships.
JPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor inmaking their investment decision. The analysts listed above are employees of either J.P. Morgan Equities Ltd. or another non-US affiliate of JPMSI, and are not registered/qualified as research analysts under NYSE/NASD rules, unless otherwise noted.
Bloombergticker MarketCap*
First Bank FIRSTBANNL LN 918.9Guaranty Trust GUARANTYNL NL 445.7Intercontinental INTERCON NL 708.6Oceanic OCEANIC NL 588.6UBA UBA NL 663.9Union Bank UBN NL 456.2Zenith ZENITHBANL NL 708.6Source: JPMorgan estimates* Market cap = NGN bln.
•
 
We initiate coverage of the top seven Nigerian banks.
We believe thesector is expensive on both an absolute basis and relative toemerging market peers.
Our models indicate overvaluation of up to56% for the banks included in this report.
•
 
On an intra-sector basis we recommend an Overweight positionin GTB. We are Neutral on Zenith, Union Bank and Oceanic, andUnderweight on Intercontinental, UBA and First Bank.
Ourcalculated 12 month total returns in USD range from 27% for GTB tonegative 40% for First Bank.
•
 
We acknowledge that economic prospects for the Nigerian economy(we expect c8% GDP growth), bolstered by sustained high oil prices,remain good and that banks will benefit from this environment.However, in our view,
bank share prices have run well ahead of fundamentals and do not incorporate the numerous risks
facingNigerian banks from both an operational and macro perspective.
•
 
Nevertheless, over the next two years, we believe
banks aresufficiently capitalised to support strong EPS growth
, averaging25% over the next 12 months and 28% in the following 12 months.
•
 
Given a price correction, we would look to enter the sector, but we donot see a near-term catalyst for price correction. Therefore, at currentpricing, in a CEEMEA context, our preference is for Russian banks(Sberbank, OW) or Central European banks (Erste, OW).
•
 
Key risks include banks’
concentrated client bases, marginpressure
from increased competition and
continued weak assetquality and efficiencies.
Political risks and vulnerability to the oilprice remain key risks for all the Nigerian banks. In our view, thecontinued vulnerability of 
smaller banks may pose systemic risks
tothe Nigerian banking system.
Table 1: 12 month total return, recommendations and target prices
Rec Total return USD* Price NGN DDM Price Target
GTB Overweight 27.1% 32.18 37.68Oceanic Neutral 3.1% 26.49 24.38Zenith Neutral -10.4% 47.24 37.91Union Bank Neutral -13.1% 39.39 30.31UBA Underweight -23.6% 57.75 38.73Intercontinental Underweight -38.1% 45.59 24.06First Bank Underweight -39.9% 46.20 23.35
Source: JPMorgan estimates, Bloomberg. Prices at cob 6 May 2008. * USD returns factors in our assumption of anappreciation of the Naira from 118:USD to 110:USD. PTs are based on dividend discount model, 12-month timeframe.
 
 3
Africa Equity Research
12 May 2008Andrew Cuffe(27-11) 507-0364andrew.j.cuffe@jpmorgan.com
Investment thesis
We are negative on the share price performance prospects for the Nigerian bankingsector. On an intra-sector view, our recommendations and target prices are asfollows:
Table 2: Valuation and recommendation summary
Share priceNGNMarket CapUSDmDDM TargetpriceTotal return inUSD* Recommendation
GTB 32.18 6011 37.68 27% OverweightOceanic 26.49 5633 24.38 3% NeutralZenith 47.24 3781 37.91 -10% NeutralUnion Bank 39.39 6957 30.31 -13% NeutralUBA 57.75 4994 38.73 -24% UnderweightIntercontinental 45.59 3870 24.06 -38% UnderweightFirst Bank 46.20 7796 23.35 -40% Underweight
Source: JPMorgan estimates, Bloomberg. Prices at cob 6 May 2008. * USD returns factors in our assumption of an appreciation of theNaira from 117:USD to 110:USD.
Table 3: Comparison of key items and ratios (FY07 y-ends)
First GTB I’continental Oceanic UBA Union ZenithMajor balance sheetitems (NGN bn)
Total assets 884.6 486.5 704.8 1038.4 1191.0 699.2 972.8Deposits 683.2 294.5 471.5 744.7 971.8 482.4 702.0Loans and advances 220.5 115.7 278.6 342.0 320.4 161.5 288.1Shareholders' funds 83.4 47.3 156.9 222.8 167.7 102.9 114.4
Per shareinformation
EPS (NGN) 1.42 1.62 1.41 1.51 2.30 1.10 1.59DPS (NGN) 0.91 0.95 0.42 1.02 1.47 1.00 1.00Dividend cover 1.6 1.7 3.4 1.5 1.6 1.1 1.6
Ratios
 ROE 23.5% 29.6% 14.3% 13.5% 19.9% 12.6% 23.9%ROA 2.3% 3.3% 2.8% 2.5% 2.1% 1.9% 17.1%Cost to income 64.5% 55.9% 60.2% 51.4% 58.9% 60.8% 63.7%Costs to avg assets 6.2% 4.9% 12.1% 5.7% 8.0% 5.9% 6.1%NIR/Total income 44.2% 45.8% 51.2% 47.4% 44.2% 43.1% 41.2%Loans to deposits 32.3% 39.3% 59.1% 45.9% 33.0% 33.5% 62.7%Capital adequacy 23.4% 16.6% 36.2% 36.0% 25.0% 27.0% 28.1%NPLS to total loans 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6%NPL coverage ratio 112.8% 112.8% 112.8% 112.8% 112.8% 112.8% 112.8%Credit chg to avg loans 1.0% 0.7% 2.4% 2.2% 1.7% 5.9% 0.8%Market capitalisation 918.9 445.7 708.6 588.6 663.9 456.2 708.6Number of branches 414 104 255 320 630 405 286Number of staff 7593 1875 3985 3743 5076 8027 5435Shares in issue 22221 17987 17987 22221 11497 11582 22221Share price NGN 45.59 45.59 45.59 45.59 45.59 45.59 45.59PE ratio (rolling) 20.0 17.4 28.6 15.5 22.5 23.5 20.9PB ratio 5.3 5.6 5.2 2.6 3.8 3.4 12.4Market cap / deposits 1.3 1.5 1.5 0.8 0.7 0.9 1.0
Source: JPMorgan estimates, Company reports, Bloomberg. Prices at cob 6 May 2008. Please note, the different y-ends make directcomparisons difficult, but these comparisons give a broad indication of variations in performance.
We are negative on Nigerianbanks for the following reasons:
•
 
Valuations appear stretchedon an absolute and relativebasis (DDMs suggestovervaluation of up to 57%,12m fwd PE ratios rangefrom 13x to 21x and PBratios avg >3.5x )
•
 
Capital raising has beenused to fund growth.Internal growth capabilityis low (cUS$12.1bn raisedby the sector in ‘06-‘07)
•
 
Competition continues tointensify (urgency to deploycapital and the race for sizehas squeezed interestmargins)
•
 
The risk of a sharp increasein non-performing loans(NPLs) has increased asprivate sector creditincreased 98% in 2007
•
 
Earnings growth visibility islow (Apart from a rapidlychanging environment,poor financial disclosuremakes prediction difficult)
•
 
Growth has moved ahead ofthe risk capabilities of boththe banks and regulator
•
 
Growth opportunity in theretail market may takelonger to realise than themarket is presentlyexpecting
•
 
The stock market has beendriven by a hot-houseeffect, moving ahead offundamentals
•
 
Bank prices do notsufficiently reflect thedifficulties imposed by alack of infrastructure, highlevels of systemic risk aswell as general economicand political risk
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...