Eyes on the prize
Sruti Patel SPatel@rencap.com+44 (207) 367 7754Kato Mukuru KMukuru@rencap.com+234 1 271 9135 David Nangle DNangle@rencap.com+7 (495) 258 7748
Equity Research6 June 2008
In this report, we extend our coverage of the Nigerian banking universe with nine initiations. We now cover 11 Nigerian banksand with this report round-out our coverage of the Nigerian financials space after having recently initiated on the 10 most liquidinsurers.
Nigerian banks have had a challenging 1H08 on the back of the excesses of 2007, which saw thesector raise NGN1,282bn (approximately $11bn) in a mix of domestic and international offerings. With bank equity-to-assetratios elevated, we believe concerns over RoAE pressure and potential ‘misallocation’ dominate the market.
Retail play misunderstood.
Nigerian banks are not a play on retail lending, but retail deposits. Capital raisings wereinitiated to improve the cost of funding and maintain bank liquidity ratios, not to open up the retail lending market in the near term, in our view.
Asset growth overlooked.
Asset growth over the next five years (47% pa) should bring equity-to-asset ratios down to2006 levels (13%) by 2009 and reduce them further to 8% by 2012; this should support the recovery in RoAEs, in our view.
With earnings growth (52% pa) expected to exceed asset growth over the next five years, we estimatethat RoAAs (for our universe of 11 banks) should improve to 2.84% by 2012; 36 bpts higher than 2006 levels (2.48%).
With the RoAE of the RC NG Bk-11 expected to recover to 32% by 2012, we value our universe of stocks at 3.31x 2008E P/B, a 20% premium to current valuations.
Keeping our eyes on the prize.
In addition to the strong macroeconomic fundamentals that should support long-termasset growth, we believe that investors should not lose sight of the prize that is
Nigerian demographics; 43% of Nigerian’s areless than 15 years old and Nigeria will be the world’s fourth largest country (by population) in 2050
Our top picks.
Within the RC NG Bk-11, our top picks are UBA, Zenith and Access Bank; the expected total returns on thesenames are 57%, 55% and 52%, respectively.
Figure 1: Relative price performance of banks sector – one year Figure 2: Three-month absolute price performance of Nigerian banks
1003005007009001,1001,3001,5001,700RC NG Bk 10UBAOceanic BankZenith Bank InternationalBank PHB NigeriaFirst City MonumentDiamond BankUnion Bank NigeriaFirst Bank NigeriaIntercontinental Bank PlcGuaranty Trust BankAccess Bank Nigeria Plc
-19.24%-15.65%-14.86%-14.33%-13.19%-12.34%-8.66%-5.89%-4.53%-0.56%5.97%22.06%-30%-20%-10%0%10%20%30%Access Bank NigeriaDiamond BankUnion Bank NigeriaFirst City Monument BankFirst Bank NigeriaBank PHB NigeriaGuaranty Trust BankOceanic BankRC NG Bk 10Zenith BankIntercontinental BankUnited Bank for Africa
Important disclosures are found at the Disclosures appendix. This research material is released by Renaissance Securities (Cyprus) Limited.Regulated by the Cyprus Securities & Exchange Commission (License No: KEPEY 053/04).