Q3 2019 Industry Report for the Banking Sub-Sector

Introduction

There are three major exchanges in Nigeria where financial instruments can be bought and sold. They are the Nigerian Stock Exchange, FMDQ and NASD. The Nigerian stock exchange is where the securities of listed companies are exchanged while unlisted securities trade hands at the NASD. For the FMDQ, it is the exchange where debt instruments are exchanged. As such, it is common for different financial instruments across different industries and companies to be traded in each of the working days.
The banking industry is one of such industries and it can be used as a proxy to measure the performance of the banking industry over a given period of time.

This report therefore provides an industry analysis into the activities and performance of the banking sector in 2019. Here, all the banks listed on the NSE would be analyzed based on financial performance as well as performance in terms of their respective share prices.

The first section provides an overview of the Nigerian banking industry. The second section gives the different gross earnings of each of the companies as well as makes sense into the numbers of those doing well and those that need to adjust. The third section consolidates the second section by providing insight into the profitability of the companies and industry in general. The fourth section explains financial performance of the banking industry in terms of creating wealth for the shareholders while the fifth section discusses the loan to deposit ratio of the industry as well as how the CBN drove the growth. In the sixth section, the share price movement during the year is analyzed and the conclusion followed suit.

The Nigerian Banking Industry

There are 165 companies listed on the Nigerian stock exchange of which 14 are banks (13 conventional banks and 1 non-conventional bank). And just like in other sectors, there are classes in the Nigerian banking industry. One of such class is the Tier-1 banks which control more than 50% of the total market share. These banks are popularly referred to as FUGAZ and they are First Bank, United Bank of Africa (UBA), Guaranty Trust Bank (GTB), Access Bank and Zenith Bank.

The 2019 banking industry was majorly affected by the monetary decisions of the Central Bank of Nigeria. There was also the case of merger and acquisition as Access Banked merged with Diamond Bank on the 1st of April, 2019. The payment breakdown showed Diamond bank shareholders received N1.00 per share in the form of cash and 2 units of Access Bank’s shares for every 7 units of Diamond bank in share payment. This was worth $235 million combined.

Overall, companies in the banking industry listed additional shares of 6.910 billion through supplementary listings. The breakdown of the supplementary listing can be found below:

In terms of equities performance, the banking index shed 10.55% as its index dipped to 356.84 points in December 31, 2019 from 398.94 points recorded in the same period in 2018. This makes it 4th lowest loser among the other indices in 2019 as all indices closed in the red in 2019, thereby conforming with Nigeria’s equity performance of -14.6% in 2019.

As at 5 February 2020, 6 of the 14 companies in the banking sector have released their full year 2019 financial results. They are First Bank, Wema Bank, Fidelity Bank, Sterling Bank, FCMB and Jaiz bank. As such, the next sections will majorly be based on the Q3 financial performance of all the banking stocks listed on the Nigerian Stock Exchange (NSE).

The Big Banks are Sweating to Increase Top Line

The 14 listed banks combined posted gross earnings of N3.62 trillion in the first 9 months of 2019. This represents a marginal increase of 3.76% when compared to N3.49 trillion recorded in the first 9 months of 2018.

Overall, Ecobank posted the largest gross earnings among all the banks as its gross earning is almost the same as what Sterling bank, Stanbic IBTC and Guaranty Trust Bank posted combined. For Access bank, gross earnings dropped by 2.85% to N513.66 billion from N528.75 billion posted in Q4, 2018. This drop exist because the Q3 2019 result was compared with Q4, 2018 as shown in the financial statement of the company. Zenith bank, First bank and UBA came next in rank as they posted N491.27 billion, N439.90 billion and N428.22 billion respectively.

Jaiz bank however posted the lowest gross earnings even though its earnings grew the most in terms of percentage change among all the banks reviewed. Gross earnings grew by 70.36% from N5.50 billion recorded in Q3 2018 to N9.37 billion in Q3 2019. Unity bank also posted a significant growth in in gross earnings as gross earnings grew by 19.63% to N31.26 billion in Q3 2019. This is as a result of the growth recorded in interest income as well as growth in fee and commission income.

Bottom Line Increases Marginally by 5.77%

In the first 9 months of 2019, the banks under review posted Profit After Tax (PAT) of N718.15 billion and this is expected to exceed N1 trillion at the end of the year. This represents 5.77% growth when compared with N678.98 billion generated by the banks in the previous period of Q3 2018. This period was characterized by treasury bills rate going as high as 17% which presents investment opportunities to the banks rather than loaning money out to the private sector. The urge to reduce expenses also led to the growth in PAT amongst the banks.

Source: Companies Financials

The illustration above shows Zenith Bank remains the most profitable Nigerian bank as it raked in N150.72 billion in the first 9 months of 2019. GTBank trails closely behind as it generated N146.99bln as Profit After Tax has been deducted.

GTBank with the lowest interest income of the FUGAZ banks, competes heavily with Zenith Bank in the race for the most profitable bank in 2019, and this is aided by a low interest expenses at N51.25bln compared to First bank interest expenses at N116.031bln which is more than double that of GTBank, Access Bank interest expenses of N194.81bln, Zenith bank interest expenses valued at N107.311bln and UBA interest expenses valued at N138.99bln. Also, its fee and commission income (income largely related to charges raised by the bank on holders of other ATM cards, who used the bank’s machines while transacting business; and SMS alert related expenses) during the period was N48.38bln. The company also earned other income valued at N43.82bln while it kept personnel expenses low at N27.299bln (First bank- N71.61bln, UBA- N55.204bln, Access Bank- N54.69, and Zenith Bank at N57.065bln).

Ecobank which led the pack in terms of Gross Earnings, trails behind Zenith bank, GTBank, Access bank and UBA when it comes to profit. A plausible reason for this is a continued increase in the company’s interest expenses as well as operating expenses. The interest expenses of N177.05 billion is three times more than the interest expenses generated by GTBank during the period under review.

Listed Banks Grew Share Holder’s Wealth by 12.19%

In the first 9 months of 2019, the total equity of the 14 listed banks combined was N4.82 trillion, thus representing 12.19% increase when compared to N4.30 trillion recorded in the first 9 months of 2018.

Source: Companies Financials

Based on total equity, Zenith bank has the largest equity value at N871.90bln, followed by GTBank with total equity value of N635.75bln. Access bank, First bank and UBA came followed the ranking with total equity values of N614.84bln, N604.93bln and N555.53bln respectively. Unity Bank however has a negative shareholders value of N242.57 billion. For Jaiz Bank, shareholder’s value dipped by 4.17% from N13.68 billion recorded in Q3 2018 to N13.11 billion in Q3 2019.

Of all the banks under review, Access Bank had the largest growth in equity value. Total equity of the bank grew by 25.35% to N614.84 billion in Q3 2019, and this is attributable to the economies of scale enjoyed as a result of merging with Diamond Bank. Stanbic IBTC also had a significant improvement in its shareholders’ value as total equity grew N292.21 billion from N239.67 billion recorded in Q3 2018. This represents a growth rate of 21.92%.

Combined Loan to Deposit Ratio for the Banks under Review is 59.49%

Recall that the CBN fined some banks on the 2nd of October 2019, for not meeting the 60% loans to deposits ratio. Zenith bank, First Bank, GTBank and UBA were the tier-1 banks fined at N135.63bln, N74.67 billion, N25.15 billion and N99.68 billion respectively. Upon noticing banks have complied with the ratio and the average had been met, the CBN decided to increase the LDR to 65% from 60%.

Giving of loans and advances to customers represent a major business of banks which brings majority of their gross earnings during a financial period. Hence, it is not surprising to see that loans and advances constitute a larger proportion of their total assets as interest earning represent the largest share of their total gross earnings.

Source: Companies Financials

Total customers’ deposit of the banks under review was N28.38 trillion as at Q3 2019 while loans and advances to customers was N16.88 trillion, thereby leading to sector’s LDR average of 59.49%.

It is pertinent to note that Access Bank is the only tier-1 bank that met the LDR of 60% as at Q3 2019, as the tier-2 banks are the ones that dominate the list of banks that complied with the directive of the CBN. With a LDR of 96.21%, Fidelity bank loans out more of its total customers’ deposits than any other bank in the country. Stanbic IBTC also complies with the CBN directive as 78.14% of its customers’ deposits are loaned out.

Ecobank which has the largest customers’ deposits of 5.63 trillion, has LDR of 55.92% which is below the benchmark of 60% because its loans and advances to customers was N3.15 trillion as at Q3 2019.

Zenith bank, First bank and Unity bank created least amount of loans among the banks under review as their LDR were 51.70%, 49.57% and 34.95% respectively.

NB

First Bank Q3 results were compared with its 2018 year-end financial performance. The total equity figures as well as loans and deposits of Sterling Bank in Q3’19 were compared with their full year 2018 total equity. Same for Stanbic IBTC.

Share Price Movement

In terms of share price movement, the data obtained from the NSE shows that Ecobank which generated the grossest earnings, had its share price decline the most. In 2019, Ecobank share price fell sharply by 54.83% from N14.08 recorded at the end of 2018 to N6.36 as at 31st December, 2019. The two most profitable banks during the period under review, are also among the major losers in terms of share price movement in 2019.

While GTBank lost 14.83% in terms of share price value, Zenith bank had its share price decline by 19.67% in 2019. First Bank, Stanbic IBTC and Unity Bank also saw a decline in their respective share prices.

In 2019, Access bank generated the highest return in terms of share price. Its share price grew by 48.63% from N6.56 as at 31st December 2018, to N9.75 as at 31st December 2019. This means that someone that has N100 thousand worth of Access Bank shares as at the end of 2018, would have its value grown to N148.63 thousand as at 31st December 2019.

Jaiz bank and Wema bank also enjoyed positive growth in their share price. While Jaiz bank recorded 21.57% growth in share price, Wema bank recorded 12.90% growth in the share price of the company. Others in the list of gainers are UBA (9.72%), Union Bank (7.71%), Sterling bank (4.74%), Fidelity bank (2.49%) and FCMB (1.10%).

Conclusion

Though the Nigerian economy is among the economies that are dragging down the growth of Sub-Saharan Africa (GDP growth rate at 2.28% as at Q3 2019), the banking sector improved more than the economy based on the different metrics used in this report. Gross earnings grew by 3.76% and PAT also grew by 5.77% as at Q3 2019. The banks were also able to increase their total equity by 12.19% while LDR during the period under review was 59.49%.

The above show the tendency of the banking sector to keep on improving despite challenges faced by the economy. It is in this sense of the financial sector influencing economic growth, which made the CBN increase the LDR to 60% and subsequently, 65% in order to drive credit to the private sector.

During the MPC meeting of the CBN on 23rd and 24th January 2019, CRR was increased by 5 basis points majorly to curtail the inflationary pressure caused by the border closure as well as the inflationary pressure of liquidity that is expected to hit the circulation as existing instruments mature.

On the flip side, if the liquidity to be mopped up from circulation exceeds the value of mature instruments, such that it takes some fraction of the banks loanable cash, then credit to the private sector would be constrained. This will drag the effectiveness of the LDR to drive economic growth through increased credit to the private sector.

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