Nigerian Banks Valuations Still Attractive In spite of Profits Drop, Says CSL

Nigerian Banks Valuations Still Attractive In spite of Profits Drop, Says CSL
Godwin Emefiele - CBN Chief

Nigerian Banks Valuations Still Attractive In spite of Profits Drop, Says CSL

Nigerian Banks valuations are expected to remain attractive despite expectation of marginal decline in profits among key players in the sector, says CSL Stockbrokers in a report.

In its outlook for 2021, the firm is expecting deposit money banks’ earnings to plunge marginally due to expected increase in impairment charge in the sector in the year.

It said the Central Bank of Nigeria (CBN) 65% minimum Loan to Deposit Ratio (LDR) policy and its policy restricting individuals, PFAs and corporates to access Nigerian Treasury Bills, fixed deposits and FGN bonds have resulted in a significant decline in asset yields for banks.

“With rates still at historic lows, we expect only a marginal improvement in yields as the year progresses”, the firm added.

Accordingly, CSL is expecting improvement in non-interest income as banks strive to increase transaction volumes following CBN’s revised fee guide on electronic transactions which took effect in 2020.

It noted that Banks were given forbearance in 2020 to restructure loans. This reduced burden of bad credits on lenders book in the period.

“With the macro situation still poor, we expect some of these loans to begin to show signs of strain and we expect increased impairments in 2021”, CSL Stockbrokers said.

Based on the aforementioned factors, the firm said it has downgraded 2020 earnings marginally but, prompted by stable asset quality, stable capital and prospects of dividend payments, analysts maintain a Buy recommendation on the Tier 1 names.

It said: “Current price to book value valuations of the banks though improved for some banks, are still low relative to African peers and in many cases price in the loss of all profits and of a substantial portion of equity in 2021”.

By contrast, CSL Stockbrokers estimates that a cost of risk of 2.5% -average for its coverage stocks in 2021 – can be comfortably accommodated by full year profits.

“We estimate that the overall impact of the current macro state will be a marginal reduction in Pre-tax profits across our coverage banks by an average of 12% in 2021”.


CSL Stockbrokers said in the report that the onset of the Coronavirus pandemic and the subsequent impact on the macroeconomic environment resulted in minimal loan growth for the banks.

As of 9M-2020, it noted that the banks under its coverage reported an average loan growth of 9.6%.

It was noted that Nigerian Banks valuations remain attractive to investors as lenders were expanding their loan books to meet the CBN’s minimum LDR.

The investment firm however stated that the onset of the corona virus pandemic and the weak macro environment has meant many have had to slow down on loan growth despite CBN’s minimum LDR requirements.

“We forecast average loan growth of 8% for the banks under our coverage”, it added.


Analysts said the CBN’s policies have resulted in a significant decline in deposit rates amidst low interest rate environment and the need to stimulate growth.

It stated that Banks are accepting fixed deposits for as low as 0.5% compared with about 10% before the announcement of CBN’s policies.

In the 9 months of financial year 2020, Banks total deposits grew strongly. CSL Stockbrokers said average growth of 25% was recorded for banks within its coverage universe.

It noted total deposits to include balances in current and savings accounts.

“With the huge open market operations (OMO) maturities against relatively small OMO/Nigerian Treasury Bill offers seen last year, large amounts have been left in current and savings accounts.

“We do not expect deposits to grow as strongly this year given expectations of thinner maturities and concerns about staying with in LDR limits.

“However, we struggle to see a situation where banks will reject customer deposits”, the firm explained.

However, analysts forecast to see an average deposit growth rate of 15% for the banks within CSL Stockbrokers coverage universe in 2021.


Following the apex bank dovish stance, analysts stated that CBN’s policies restricting individuals, PFAs and corporates to Nigerian Treasury Bills, fixed deposits and FGN bonds have resulted in increased demand for T-Bills, forcing down rates.

“Banks are accepting deposits at about 0.5% compared with about 10% previously”, it noted.

CSL Stockbrokers stated that cost of funds declined significantly in 2020 and does not anticipate an upward revision in 2021 at least for the first half of the year.

“Given anticipation of lower volumes of OMO maturities in 2021, we expect a gradual increase in yields towards the end of the year if left totally to market forces without regulatory interference.

“Consequently, we expect cost of funds to increase slightly towards the end of 2021, though lagging any anticipated increase in yields.

“We estimate an average of a 40 basis points increase for our coverage stocks”, analysts at CSL Stockbrokers stated.


On assets yield, analysts are expecting reduced lending to stifle asset yields but they think Nigerian Banks valuation in the stock market has remained undervalued for long.

“We also expect the continuous CRR debits by the CBN which sterilises funds which otherwise should be earning Interest to weigh on asset yields.

“On the positive side, we expect excess CRR as CBN returned like 60-70% to banks as special bills to earn about 0.5% to add to the bottom-line albeit marginally”, analysts added.

Many banks have been previously long on fixed income securities which have been offering support to yields on investment securities which for many banks is still in the double-digit range.

“This should keep assets yield fairly stable. We do not envisage any further decline in yields on fixed income securities given that we expect OMO maturities to slow down”.

It explained that OMO volumes opened last year with about 14 trillion, but stands at about N4 trillion now.

“If market forces are allowed to play, we expect yields to trend up marginally as the year progresses”, analysts projected.


CSL Stockbrokers said it is expecting net interest margin to remain relatively stable in 2021 , noting that rates is not expected to plunge further in the financial market.

“Overall, we believe Net Interest Margins (NIMs) in the short to medium term will remain relatively stable”.


But to close the gap in low interest income earnings, analysts have maintained expectation that lenders would increase transaction volumes.

Recalled the CBN in January 2020 published a revised fee guide for banks with reduced fees for a number of transactions including e-banking related transactions.

This translated to about 46.15% cut in ATM withdrawal fees to N35 from N65, and a reduction in electronic transfer fees.

The circular effectively reduced electronic transfer fee from a minimum of N50 per transfer to N10 for transactions below N5,000, N25 on transactions between N5,001 and N50,000 and N50 on transactions above N50,000.

“This significantly impacted banks’ e-banking income in 2020 but banks have been working to improve transaction volumes to make up for the decline”.

However, it noted that the growing investment by many banks in digital technology and the onset of the covid-19 pandemic which has made many customers opt for online transactions should contribute to growth in Non-Interest Income.

However, CSL Stockbrokers said it expects a few Fees and commission income lines to be pressured in 2021.

It listed affected income line to include credit related fees, brokerage and intermediation fees, Commissions of trade services and LC Commissions

“Overall, we believe banks will struggle to increase transaction volumes and digital services to make up for lost income”, CSL Stockbrokers said.


Analysts hinted that banks are to rely on operating expenses management to support improved earnings growth in 2021 more than ever.

It added that expectation of an increase in inflationary pressures in 2021 implies at least a marginal impact in banks’ costs.

Based on industry data, it noted that the Tier 1 banks reported an average cost to income ratio of 56.3% as at 9M-2020 while the Tier 2 banks reported an average of 61.8%.

“Nigerian banks have all been making concerted efforts to reduce costs.

“While they all appear to have made some progress, GT Bank stands out in maintaining Cost to Income Ratio (CIR) below 40%, reporting CIR ex-provisions of 38.8% for 9M 2020.

“Sterling and Fidelity bank’s cost to income ratio of 73.4% and 66.3% respectively were the highest in our coverage universe for 9M 2020.

“Tier 2 players typically have the higher CIRs due to their lower operating incomes relative to fixed banking costs.

“We expect reduced operational costs on the back of covid-19 that has led to branch rotations and majority of bank staff working from home to help reduce overall operating expenses for many banks.

“There has also been a reduced cost due to travel restrictions. We expect that banks will leverage this to aid improved earnings”, CSL Stockbroker highlighted.


CSL Stockbrokers projected that impairment charges are set to rise in 2021 as cost of risk (COR) came at an average of 1.5% for banks under its coverage in 9M 2020.

It added that low ratio mainly reflects regulatory forbearance due to the coronavirus pandemic which led to many restructured loans.

“As of June, almost one-third of all industry loans had been submitted for loan restructuring Associated provisioning policy has also been less aggressive.

“We expect some deterioration in asset quality in 2021. We forecast an average of 2.5% COR for the banks we cover given that we expect the CBN to extend forbearance.

“We also expect lower recoveries as collateral sale will prove more difficult in the face of the pandemic. We expect deterioration in asset quality to impact liquidity position of some banks”.


The firm said that capital adequacy is a persistent issue for several Nigerian banks.

The CBN requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15.0% while banks without international subsidiaries maintain a CAR of 10.0%.

Analysts explained that the minimum requirement for systemically important banks is 16.0%, although CBN is still giving forbearance.

“Impact on capital adequacy comes from expectations of further currency devaluation if oil prices begin to decline again”.

Oil prices are currently up but mid-term expectations remain uncertain. However, analysts hinted that they expect relative currency stability and moderate devaluation.

“Devaluation, in theory, challenges capital adequacy ratios (CAR) because the Naira-equivalent value of risk-weighted assets (RWA) rises as these include foreign currency loans.

“ However, the weight of foreign currency loans in RWAs is for the most part moderate (39%-45%), and some banks will likely make windfall gains from net long FX positions which in turn boost capital.

“Asset quality also poses a challenge to capital adequacy. If a bank suffers an unexpected rise in cost of risk that exceeds the capacity of one year’s profits to absorb it, then that bank will be looking at writing down capital.

“For the banks we cover, we estimate that they will make sufficient profit to absorb Impairments within the year and would not require any write down in capital”, CSL Stockbrokers stated.

Officially, Nigeria’s Economy Sinks 6.1% amid COVID-19 Outbreak

Nigerian Banks Valuations Still Attractive In spite of Profits Drop, Says CSL