JP Morgan names GTB, UBA 'preferred stocks'
J.P. Morgan , a leading financial services firm with global scale and reach, has named Guaranty Trust Bank (GTB) and United Bank for Africa (UBA) as its 'preferred stocks in the Nigerian banks space, while adjudging Nigerian banks as having the highest cost base amongst their peers.
It says that each of the bank offers an attractive 45 per- cent potential upside to their December 2014 fair values - among the highest within the CEEMEA banks currently. CEEMEA is an acronym for Central and Eastern Europe, Middle East and Africa. It is used by investment analysts to refer to reports that cover economies or businesses in this region.
'While GTB's valuation (2.0x14E t.book) is at a 33 per- cent premium to the CEEMEA peer average (1.5x 14E), we estimate its offers roughly 60 per cent higher tangible ROE vs. The CEEMEA average (29 per cent 14E in GT - the highest in CEEMEA banks - versus 18 per cent 14E CEEMEA) and nearly double the dividend yield.
'UBA on the other hand offers a 30 per cent higher tangible ROE (of 23 per cent in 14E) on our estimates vs. CEEMEA banks average and a significantly higher dividend yield (10 per cent) for a 33 per cent valuation discount (1.0x14E tangible book) vs. CEEMEA banks.'
Refreshing its ratings and views on shares of four Nigerian banks within its coverage, JP Morgan upgraded Guaranty Trust Bank Plc (GTB) and United Bank for Africa Plc (UBA), from Neutral to Overweight.
FBN holdings and Zenith Bank Plc were on the other hand downgraded. While FBN Holdings was downgraded to Neutral from Underweight, Zenith was downgraded to Overweight from Underweight.
The report also notes that investors may be missing out on the opportunity presented by UBA shares despite improving fundamentals of the bank. 'However, consensus is catching up fast - UBA has the best buy, or hold, or sell ratio on Bloomberg consensus.'
The JP Morgan report also explains that UBA benefits from significant balance sheet liquidity noting that the bank's loan to deposit ratio of 37% as at half year 2013 was the lowest among CEEMEA banks covered by the investment bank.
JP Morgan however forecast that UBA's loan to deposit ratio is 'conservatively expected to rise gradually to 45% by 2016 year end.
JP Morgan notes that UBA's loan to deposit ratio is 'reflected in UBA’s market shares where it is second in Nigeria in deposits with 13% market share, but has lowest lending market share at 8% among the four biggest banks JP Morgan tracks in Nigeria.
UBA pan-African presence is also seen as strength in the bank's operations. JP Morgan notes that UBA has the highest number of subsidiaries in Africa among the top-tier Nigerian banks with positions in 18 African countries outside Nigeria and potential to drive future revenues on rising intra-Africa trade.
'This pan-African presence and valuation discount increases the attractiveness of UBA as a potential take-out story, in our view, given our understanding on larger regional banks (e.g. South African banks) for pan-African franchises such as UBA’s.'
Notably, 'UBA has the lowest mix of Commission on Turnover (COT) growth in its overall fee income mix when compared with peers. Excluding fee income, we see average Net Interest Income (NII) growth of 15% every year from 2013 to 2016' according to the JP Morgan report.
'UBA's valuation is an opportunity to buy into what may be the most attractive risk-reward in CEEMEA banks; for a 33% valuation discount versus peers, we estimate UBA offers 23% 2014 year end premium on Return on Equity (ROE) and significantly higher dividend yield of 10% by 2014 year end'
JP Morgan expects that the Nigerian government's reforms agenda in oil and gas, power, agriculture and infrastructure sectors will drive the future banking growth, the sector which UBA has recently been highly bullish on with new loan growth targeted at these sectors.
Due to increased levy paid to the Assets Management Company of Nigeria (AMCON) as well as the poor state of infrastructure in the country, Nigerian banks have been discovered to have the highest cost base amongst their peers.
According to the JP Morgan's report, 'Nigerian banks have higher cost/income ratios versus their Central and Eastern Europe, Middle East and Africa (CEEMEA) bank peers due to lack of necessary infrastructure in form of quality manpower, steady electricity supply, security of physical assets, etc.'
Noting from levies paid by banks to the bad bank that AMCON has risen substantially in recent times, JP Morgan's analysts in a report on Nigerian banks said, 'Higher AMCON levy limits cost/income improvement on our estimates.'
The report noted that contribution to the sinking fund of AMCON has risen to 50 basis points (bps) of total banking assets per annum compared to 30bps previously. 'Following the increase in AMCON levy, we believe AMCON charges will rise 130 per cent year-on-year average 2013 estimate versus 28 per cent year-on-year 2012 audited, adding to the operating expenses growth this year and 11 per cent year-on-year per annum average 2014-16 estimate; between 2013-2016 estimates, we expect AMCON charges to form 11 per cent of Nigerian banks cost base versus five per cent previously.'
Apart from increased operating cost due to contribution into the AMCON sinking fund, JP Morgan analysts say they also expect banks to strive to make up for loss of revenues arising from regulatory pressure on removal of commissions on turnover (COT). 'On average for the banks under our coverage, COT formed 44 per- cent of 2012 actual fee income and 10 per cent of overall revenues; COT will be phased out gradually through 2016 estimates and we believe banks will look to recover this revenue loss via higher focus on fee-yielding transactions and participation in higher-yield financial intermediation.
'However, we estimate average fee incomes as a percentage of total revenues to decline from 24 per cent 2012 actuals to 15 per cent 2016 estimates with a flat year-on-year annual growth in fee income through 16E (following 16 per cent year-on-year 2012 actuals).'
The report forecasts a 25 per cent year-on-year average growth in non-performing loans (NPL) of banks between 2013 and 2016.
The investment banker noted that 'recent guidance on NPL development within these banks has remained low; nevertheless for our 2013-2016 estimates forecasts, we have assumed a steady deterioration in the NPL ratio including the 16-17 per cent year-on-year average annual loan growth that we have forecast for these banks for 2013-2016 estimates.'
'We see this estimate as conservative but given the lack of a consistent, comparable disclosure from the banks, low economic diversification, tendency to shift lending mix to higher yield categories in 2013-2016 estimates as discussed above. Feedback from channel checks and excesses observed in the past, we prefer to err on the side of conservatism,' the JP Morgan report stated.