HSBC Global Research has adjudged Zenith Bank Plc the best managed financial institution in the country due to its good quality assets and cost management strategies. Read more
The HSBC report on sub-Saharan African banks also upgraded the bank for being least sensitive to increase in cost of savings accounts.
The research report which also covered First Bank, GTBank, United Bank for Africa plc, noted that Zenith Bank’s low upside risk to bad asset charges provide it with more room for earnings growth in 2013 with additional 8 percent on its pre-tax basis.
“Interest rate environment is favourable for Zenith’s net income margin (NIM). We raise our target price to N24 from N23 on positive earnings revisions and upgrade the stock to overweight (OW) from neutral,” the report stated.
Looking at the investment prospects, the report observed that tighter regulation of fees and cost of savings accounts since the first quarter of this year and cyclical increase in cost of risk may have set the stage for multi-year compression of the sector’s return on equity.
It also noted that the pressure to improve operating costs so as to preserve returns is getting stronger, while large fixed cost base should limit the gains, with expectation of a more disciplined loan pricing policy.
“Our favoured play is Zenith Bank (OW, TP N24). It is least sensitive to rising cost of savings accounts, can hold its NIM better than competitors, delivers better cost control and asset quality,” the report stated.
The HSBC global research envisages that Nigerian banks should be more disciplined on loan pricing as a result of reduction in fee income, while also reflecting on the increased loan spread assumptions for banks under coverage.
The recent contraction in the combined market capitalization of the banks, occasioned by the regulations amounted to about N220 billion ($1.3 billion), which according to the report, compares with the potential income fee loss of N88 billion ($546 million) through to 2016, with the increase in cost of funds of N22 billion ($136 million).
“However, a N220 billion [$1.3 billion] drop in market capitalization does not look adequate if one includes the cost of rising loan provision expenses, which bottomed in 2012 on loan portfolio de-risking.
We estimate banks will need to increase them by a cumulative N76 billion ($471 billion), and if normalizing for the large 11 percent over due but not impaired loan book of one of the top banks (UW,TP N16), the sector cumulative provision expenses goes up to N257 billion ($1.59 billion).
Summing it all up means that the combined market capitalization has another N147 billion in downside risk, which is 10 percent from where we are today,” said the report.
It further observed that banks have little room to maneuver on costs as about 40-50 percent of the cost base is fixed.
HSBC also said that its re-examination of the cost structure of the banks covered suggests that UBA and Zenith were the two banks which made the strongest progress in controlling cost.
According to the report, this can be seen in the improvement in headcount per branch numbers in the case of Zenith and in the cost of income ratios of both banks.”
By AMECHI OGBONNA
CULLED FROM THE SUN NEWSPAPER
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