Clean up of banks’ books will leave more room for profit — Highcap Securities boss

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David Adonri, Managing Director/CEO, Highcap Securities Limited, spoke of the impact of the loan provision by the banks and said it would position them to deliver better and sustainable profit and improved returns to shareholders.

By Nkiruka Nnorom

HOW will you assess the first half financial results of banks already released?
A lot of those first half result were impressive, part of the reason the market went into a rally in the second half. You know the rally started around April because those results were impressive. Some of the banks, I think, are coming up with interim dividend already and the market is responding very well. So, the banks in aggregate have performed well so far and the market is rewarding them for their performance.

I noticed that the provision the banks are making for non-performing loan is still high. So, what does this tell of the stability of the banking sector and their earnings outlook?

•David Adonri, MD/CEO, Highcap Securities

It is a positive development for the sector because they are cleaning up their books. The good thing is that they have the profit they are using to clean up their books. So, all those non-performing loans are now being removed from their books so that their books will be cleaner and their profit will be more reliable and ascertained. So, they are moving in line with prudential guideline. You know that those non-performing loans came up during the period of economic crisis when some borrowers could not fulfil their repayment obligation, it was that crisis that caused the problem for them, but they are cleaning all those things out.

Financial standing

When those borrowers have the capacity to repay, they will bring them back into their books as profit. So, it is a positive development. If they can completely clean their books, they will be in a good financial standing going forward.

If you look at the full year results of the banks for 2016, you will discover that their profit was buoyed by forex gains. So, given that foreign exchange has come down to N360 per dollar, where does this leave them in terms of profitability going forward?

You know the exchange rate devaluation was in their favour. They made a lot profit from that devaluation, but the market has been stabilised. So, their profit will no longer come principally from exchange rate but from other services and also from their investment, especially in government securities that have very high interest rate. That is where their profit will come from now. So, I don’t expect them to make that kind of money they made last year when foreign exchange was skyrocketing. Now that the exchange rate has stabilised at N360/365, and thereabout, that portion of their profit will give way.

What are some of the things the banks can do to make up for the gap that non-availability of forex gain will create in their profit?

If you look at it, interest rate is still increasing and so, that will cover up for that gap and because business environment is also improving, most borrowers will be in a position to repay now. A lot of those non-performing loans will start performing again and business activity will also increase as the economy recovers.
You said that the market is rewarding the banks for their performance, but the banking index which measures their performance is still oscillating. Looking at this, what would you say is still affecting confidence in the sector?

If you compare the banking sector to other sectors, you will discover that year-to-date, the banking sector has done much better than most of the other sectors. You know that the market reaction is not in perpetuity; market reacts to an event and after the reaction, it cools down. That cooling down could be by speculators coming in to take profit. So, that will depress price for a while until another price sensitive information comes to the market and result in another rally. So far, no price sensitive information has come in yet to cause another rally.

Secondly, the judgement is not particularly on the banking sector alone. It is a judgement on the entire economy. Investors’ confidence, if anything, is trying to come back now. One of the best things that happened to the economy was the investors and exporters forex window that was opened. For foreign investors, the ease with which they can repatriate their money is more important to them than the money they are making. So, as soon as that investors window was opened, a lot of things began to change. You will also observe that the window was patronised heavily and it is still being patronised.

The tier one banks that have released their H1’17 results have declared interim dividend. Should this be an indication of where the sector and the entire market would be headed this year in terms of return for shareholders?

Yes, the economy is recovering and market is already showing signs of that recovery, and so corporate earnings will be more impressive and distribution to shareholders will be much better than what we had in the past. You also know that some of the tier one banks, especially GTBank has been stable in paying interim dividend. So, what the banks have done is in line with expectations.

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