HSBC Recently initiated coverage of 5 Nigerian banks namely, Access Bank, First Bank, Guarantee Trust, UBA and Zenith Banks.

HSBC Bank Coverage

While there are issues, there is still reason to be optimistic. The summary is below:

- Global financial crisis has hit these banks hard; no toxic asset exposure, but beset by internal disclosure and lending issues
- Stress tests show robust BV, material but manageable risk from corporate loans and a strong c19% 3-year earnings CAGR
- Valuations appeal; we initiate on five banks, but prefer UBA (TP: NGN20) and GTB (TP: NGN19), both Overweight (V)
- Some domestic issues, such as margin lending, probably prevent Nigerian banks from being viewed purely as collateral damage in the financial crisis
- Material earnings downside remains, but the more delicate issues of the resilience and stability of book value should be behind us
- Valuation is of the essence: an average 2010e PE below 6x and P/B of c1x for c19% CAGR are unmatched in our coverage universe; we prefer GTB and UBA, both rated Overweight (V) on initiation

We would also highlight some of the more positive traits of the NG banks in this report.
- With capital adequacy ratios in excess of 20%, they are in a league of their own. However, our health warning about capital adequacy numbers still pplies: the amount of capital needs to be right rather than just high. We also note that most banks do not have a controlling shareholder; while positive overall, this fact probably leaves much space for state intervention.
- No toxic assets: like their South African peers, the Nigerian banks steered clear of the toxic assets that continue to plague the US and Western Europe.
- The potential for growth is sizeable and largely untapped. Studies available from some of the banks estimate that up to 24 million people have yet to be included in the banked population, which, given both the country’s demographics and its income dynamics, leaves the banks with considerable potential to capture new customers. This assumes that they can emulate or capitalise on potential telecoms competition.
- Banking penetration is low. According to a study by McKinsey, less than 1/1,000 people have a bank card, and mortgages stand at a fraction of a percent of GDP. In South Africa, by contrast, c78% have a bank card and mortgages stand at 18% of GDP.
- The regulator’s attitude to foreign ownership is changing. The Central Bank governor recently said that restrictions on foreign ownership of banks were “not a sustainable policy”.
- Finally, we see a number of sources of potential earnings upside: c2% from branch expansion and optimisation, almost as much on cost control and more than 4% from infrastructure improvement. While some of these increases may take time to come through, we believe they place NG banks in an attractive position within our coverage universe.

You can download the article below:
HSBC - Coverage of Nigerian Banks - June 2009 (69)