How Nigeria’s 5-Biggest Lenders Fared In 9 Month In 2020

Despite the negative impact of the COVID-19 pandemic and other headwinds that characterized the year 2020, the performance of Nigeria’s 5- biggest lenders — First Bank, UBA, Zenith, Guaranty Trust Bank (GTB) and Access (a.k.a. FUZGA), on average is set to surpass that of 2019 given their average performance thus far in 2020.

Analysis of the recent 9-months earnings results of these lenders shows that the FUZGA combination grew their 9-months Gross Earnings for 2020 by 6.91% to N2.370 trillion, compared to N2.217 trillion reported in 9M’19, while Post-Tax Profit of the FUZGA combination grew by 3.95% to N535.385 billion compared to N515.025 billion in 9M’19.

On the other hand, the Total Deposits collected by the five lenders in 9M’2020 rose by 21.31% when compared to the corresponding period of 2019 to settle at N25.869 trillion, while Total Assets of the combination rose by 19.68% to N34.774 trillion from N29.056 trillion as at the end of December 2019.

This performance confirmed that the Nigerian banking sector successfully weathered the storm of COVID-19 pandemic; a further justification of why the sector kept growing even when the broader economy had slid into a recession.

However, by disaggregating the combined performance of the five major lenders, we notice that, though all the five lenders recorded growth in Gross Earnings in the 9-months of 2020, only Access, First Bank, and Zenith were able to cascade the Earnings growth to improved Pre-and-Post-Tax Profit due to varying factors.

Snapshot of Access Bank Performance in 9M’20

Access bank Gross Earnings in 9-months 2020 grew by 14.21% over the corresponding period of 2019 to N650.397 billion. This represents the highest 9-months Gross Earnings by any Nigerian bank in 2020 and was mainly driven by a 145% increase in Non-interest income to N184.712 billion.

The bank’s Non-interest income increased on the back of a 31.37% increase in Fee & Commission income to N87.883 billion and a 2,431% increase in Trading gains to N84.192 billion.

However, Interest income and Other operating income of the lender fell by 7.34% and 1.41% to N375.283 billion and N32.79 billion in 9M’20 respectively compared to N405.024 billion and N32.26 billion in 9M’19.

We suspect that the reduction in the bank’s Interest income may not be unconnected to the recent accommodative interest rate regime of the CBN, necessitated by the need to revive the economy from the negative impact of the COVID-19 pandemic through the reduction in the cost of capital, especially to real sector players.

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Nevertheless, the bank’s Post-tax profit printed at N102.300 billion, representing an increase of 15.67% compared to the corresponding period of 2019.

In terms of balance sheet performance, the bank’s Total Assets grew by 10.9% to N7.924 trillion compared to N7.143 trillion in 9M’19, driven mainly by the 14.3% increase in loan provision to N3.502 trillion, in compliance with the new CBN loan-to-deposit rate policy of 65% minimum.

Based on the 9M’20 earnings performance of the lender, our Q4 earnings projection for the bank, and the macroeconomic outlook for the bank’s biggest market, Nigeria, we review up our target price for Access bank stock on the Nigerian Stock Exchange (NSE) to N11.15, from N8.60 earlier set at the beginning of Q2’20, occasioned by the then projected impact of COVID-19 on the Nigerian economy.

Snapshot of Guaranty Trust Bank Performance in 9M’20

Guaranty Trust Bank (GTB) grew its Gross Earnings in 9M’20 by 3.25% to N341.742 billion from N330.967 billion in the corresponding period of 2019. This was jointly driven by a 1.80% increase in Interest Income to N341.742 billion, a 2.34% increase in Non-interest Income to N59.495 billion, and a 3.46% increase in Other Operating Income to N45.34 billion compared to the corresponding period of 2019.

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The 2.34% growth in Non-Interest Income was mainly driven by the 96.90% increase in Trading gains (to N18.98billion) and a 2,725% increase in Net-impairment reversal on financial instruments (to N3.11 million), despite the 22.69% dip in Fee & Commission Income which settled at N37.400 billion.

However, as a result of the joint increases in cost heads such as Personnel expense (up by 5.20% to N28.72bn), Other operating expenses (up by 9.93% to N60.07bn), and Depreciation and Amortization provision (up by 39% to N21.57bn), the bank’s Pre-tax and `Post-tax profit weakened by 1.93% and 3.20% respectively to print at N167.35 billion and N142.28 billion, compared to N170.65 billion and N148.99 billion in 9-months of 2019.

In terms of balance sheet performance, the bank’s Total Assets rose faster by 22% to N4.57 trillion, while Total Liabilities increased by 12% to N3.82 trillion. The strong increase in the value of its Total Assets was mainly buoyed by improved loan provision (up by 5% to N1.57 trillion) in line with the CBN loan-to-deposit ratio policy of 65%, and the huge restricted deposits and assets with CBN (as Cash Reserve Ratio) to the tune of N1.17 trillion.

Given the performance of the group in its 9-months earnings result, our earnings projection for the bank for the next three quarters (Q4’20 – Q2’21), and the expectation of a gradual recovery of the Nigerian economy from recession in three to four quarters to come, we review our target price for Guaranty stock to N36.15 from N34.40 earlier set post Q2’20 earnings results.

Snapshot of First Bank Plc. Performance in 9M’20

First Bank Nigeria Holdings Plc, Nigeria’s oldest commercial bank with over 126 years of operational history grew both its Gross Earnings and Post-tax profit in Q3’20 by 5.46% and 15.05% to N432.20 billion and N54.35 billion respectively compared to Q3’19 figures of N409.81 billion and N47.25 billion.

The growth in the bank’s Gross Earnings was mainly driven by the 52.22% increase in the aggregate Non-interest income component of its earnings to N132.41 billion, while the Interest income component of its earnings and Other income component fell by 6.84% and 36.32% to N297.71 billion and 2.08 billion respectively compared to 9M’19.

Specifically, the gains in Non-interest income came from the 15.18% increase in Fee & Commission income to N87.59 billion, 452.11% increase in Net-gain on sale investment securities to N41.18 billion, and a 4.61% increase in Net-gain on financial instruments at FVTPL to N3.63 billion compared to Q3’19.

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Despite the 7.18% increase in Personnel expenses to N74.17 billion and a 26.69% increase in provision for Depreciation & Amortization to N18.56 billion, the bank’s Pre-tax profit grew by 16.24% over the corresponding period of 2019 to N63.31 billion, supported by the 3.62% reduction in Other operating expenses to N117.03 billion. As such, Post-tax profit settled at N54.35 billion, representing a 15.05% growth over that of Q3’19.

In terms of balance sheet performance, the bank’s Total Assets increased by 17% to N7.24 trillion, aided mainly by the 10% increase in its loan book to N2.87 trillion. This we suspect was driven by the CBN loan-to-deposit rate policy of 65% and the 18% increase in total deposit received compared to 9M’19.

Although we noticed that the disposal of one of the group’s subsidiaries business, FBN Insurance, added N19.90 billion and 35kobo to its Earnings and EPS for 9M’20, we believe the group is on track to meet our FY 2020 Earnings, Post-tax profit, and EPS forecast of N510.81 billion, N70.25 billion and N1.96, by the end of the 2020 financial year.

Hence, we revise upward our target price for FBNH stock to N8.26 from N7.40 earlier set in Q2’20.

Biggest Lenders: Snapshot of UBA Plc. Performance in 9M’20

United Bank Plc group in its 9M’20 earnings result grew its Gross Earnings by 5.94% to N453.67 billion when compared to the corresponding period of 2019, but reported a decline of -5.51% in Post-tax profit which settled at N77.13 billion compared to N81.63 billion in Q3’19.

The growth of the bank’s Gross Earnings was jointly driven by a 6.46% increase in Interest Income to N317.14 billion, and a 6.94% increase in Non-Interest Income to N130.73 billion, despite the 28.14% dip in Other Operating Income to N5.79 billion from N8.07 billion in 9M’19.

Nevertheless, the group’s Pre and Post-tax profit dipped by 8% and 5.51% to N90.37 billion and N77.13 billion respectively, largely as a result of the sharp increases in some key cost items. Notably, the bank’s Fee and Commission expense rose by 23.8% to N23.77 billion, Personnel expenses rose by 20.67% to N66.62 billion, Depreciation and Amortization provision rose by 23.82% to N14.37 billion, and Other operating expense increased by 17.78% N111.67 billion compared to the corresponding period of 2019.

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In terms of balance sheet performance, the bank’s Total Assets increased by 26% to print at N7.06 trillion, driven largely by the 13% increase in Gross Loans to N2.45 trillion and a 51% increase in Cash balances with the CBN due to the high Cash Reserve Requirement of 27%.

On the liability side, the bank’s Total Liability rose sharply by 28% to N6.40 trillion, driven largely by the 37% increase in Total Deposit to N5.60 trillion compared to 9M’19. Hence, as a result of the double-fold increase in Total deposit compared to loans’ provision, the bank’s loan-to-deposit rate weakened to 43.7% from 52.9% in the corresponding period of 2019 to trail CBN’s regulatory loan-to-deposit benchmark of 65%.

Although the bank’s current 9M profit trailed that of 9M’19, we up our target price for the bank’s stock to N9.50 from N8.20 earlier set at the time of the release of its 6-months earnings result, owing to the sustained improvement in macroeconomic activities post-COVID-19 lockdown in Nigeria (the bank’s biggest market), and the expected reduction in Fee & Commission expenses in Q4’20 and in the near term, due to the recent CBN policy which lowered interest rate on Savings deposit to 10% of MPR (from 30%), effective from September 1, 2020.

Biggest Lenders: Snapshot of Zenith Bank Plc. Performance in 9M’20

Zenith Bank Plc., one of Nigeria’s prime lenders grew its Gross Earnings and Post-tax profit in 9-months 2020 by 2.84% and 5.70% to N492.31 billion and N159.32 billion respectively compared to the corresponding period of 2019.

The growth in the bank’s Gross earnings relative to 9M’19 was mainly impacted by the 5.85% increase in Non-interest income to N148.94 billion, and a 52.92% increase in Other operating income to N24.55 billion despite a 0.97% reduction in Interest income to N318.82 billion compared to N321.94 billion realized in the corresponding period of 2019.

Although the bank recorded considerable increases in cost items such as the 5% increase in Personnel expenses to N59.92 billion, 12.23% increase in Other operating expenses to N115.24 billion, and a 25.67% increase in provision for Depreciation and Amortization to N18.73 billion, its Pre-tax profit settled at N177.28 trillion, and this represents an increase of 0.62% when compared to 9M’19.

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However, due to a lower effective tax rate provision of 10% in 9M’20 compared to 14% in the corresponding period of 2019, the bank’s Post-tax profit settled at N159.31 billion, representing a growth of 5.70% over N150.72 billion reported in the corresponding period of 2019.

In terms of balance sheet performance, the bank’s Total Assets increased by 26% to print at N7.97 trillion (now the biggest among its peers), owing mainly to the 18% increase in loan provision to N2.71 trillion and a 92% increase in Cash balances with the CBN as a result of the increase in CRR to 27.5% (from 22.5% last year) and deductions for failing to meet the loan-to-deposit ratio of 65% in the last two quarters.

Based on the 9-months performance of the bank which has remained strong despite COVID-19 and other headwinds, the gradual improvement in economic activities in Nigeria (the bank’s biggest market), and the expected reduction in Fee & Commission income for Q4’20 and the near term due to the recent CBN reduction of interest rate on Savings deposit to 10% of MPR, we upgrade our target price for Zenith stock to N26.35 from N24.30.