However, average yields on the Nigerian fixed income securities have consistently declined in 2012, falling from as high as 18 percent at the beginning of last year, to 12 percent by year end.
“Yields are likely to decline by 200 basis points (bps) below the 2012 average this year,” says Taiwo Yusuf, a Meristem Securities analyst, in a 2013 outlook briefing, held in Lagos Tuesday. Yusuf further stated that the earnings growth of 82 percent achieved in the financial services sector in 2012 is unlikely to happen in 2013.
“We expect earnings growth of 20 percent, for 2013 driven by efficiency and low cost of risk,” he said.
Investors were drawn back to bank shares in 2012, helping to push the Nigerian Stock Exchange (NSE) banking index up 44.53 percent in the past year, and outperforming the wider NSE All Share Index (ASI) which rose by 35.42 percent for the same period.
Falling bank yields may impact on shares of quoted banks which will dip in the course of the year. Bank stocks have continued to outperform others in the NSE on the back of high yields.
The banks have declared cumulative after tax profits of N362.2 billion in the nine months to September 2012, however aggregate credit to the private sector has grown by a meagre 5.44 percent in the eleven months to November 2012, according to Central Bank of Nigeria (CBN) data.
The first few weeks of 2013 have witnessed the trending drop in fixed income yields. For example, the yield on Nigeria’s benchmark 10 year domestic bonds due 2017 dropped by 77 basis points (bps) to 11.13 percent, from 11.90 percent at the beginning of the year, according to January 14, data on the Financial Markets Dealers Association (FMDA) website.
Some analysts say the banks have an opportunity to expand retail lending, as net interest margins (NIMs) compress on falling fixed income yields.
“There is a massive untapped retail and non-Tier I segment of the market which is likely to generate attractive returns, assuming the banks are ready to move (even moderately) to the next risk layer,” said Samir Gadio, an emerging markets Strategists at Standard Bank group, London.
Some banks are beginning to do just that. First Bank of Nigeria (Nigeria’s biggest bank by assets) boosted its loan book by an annualised 30 percent in the first nine months of 2012, reflecting a strategic shift to move up the risk curve.
While Nigerian bank stocks may not rise in 2013 as much as they did last year, they remain a long term value proposition for investors, says Gary Watson, director of research at Meristem Securities.
“The banks earnings are now more of a higher quality, underpinned by Nigeria’s growing economy, growing incomes and young population,” Watson said.
Nigeria’s banking sector has been largely transformed, after the Central bank of Nigeria (CBN) intervention, and the subsequent reform has reshaped the industry.
Future earnings growth, which will drive stock prices higher will come from a continued fall in cost to income ratios, growth in the bank’s balance sheet, and multiple expansion, as the banks remain largely undervalued said Watson.
Nigerian banks currently trade in a range of between one and three times book value, as against the four times book value they traded in the growth period before the banking crises of 2009.