TM +234-8107596134 +234-1-2714713-4

444

….

January 21, 2014

NIGERIA ‖ ECONOMY

http://morgancapitalgroup.com/pdf/morgan_capital_equity_research_impactof_crr.docx_.pdf

MorganCapital Research

African Frontier Market

LEAD ANALYST

Chuks Anyanwu [email protected]

+234-8066397836

SALES

Morayo Jaiyeola [email protected]

+234-8107596134 +234-1-2714713-4

REGULATORY COMPLIANCE

Taiwo Balogun [email protected]

MD/CEO

Ayoleke O Adu FCS, CFA [email protected]

The Nigerian Economy: 2013 in retrospect

The Nigerian Economy recorded improvements in major areas in 2013. Gross Domestic

Product (GDP) grew at an average of 6.8% driven by the non-oil sector of the economy

comprising Agriculture, Banking and Insurance, Real estate Tourism & Hospitality and

Building & Construction. Nigeria’s GDP grew much faster than Ghana, South Africa and

Angola on the African Continent and Brazil, Indonesia, and Turkey on the global stage in 2013.

The Central Bank Nigeria also strived to ensure Monetary Policy stability with the bench mark

rate retained at 12% for the most part of the year and inflation reaching its lowest point at 7.8%

in over 5years in October 2013. Inflation closed the year 2013 averaging 7.9%. Other major

talking points in 2013 are the successful privatization of the Nigerian power sector which is

expected to reenergize the sector and further strengthen the country’s resolve of becoming one

of the top 20 economies in the year 2020. The Decision of the monetary policy committee to

hike the Cash Reserve Ratio of Banks for Public Sector deposits from 12% to 50% was another

major talking point in 2013 as the impact of the tight monetary policy stance of the Central

Bank Governor saw commercial banks in Nigeria struggle with the effect of the new policy on

their interest income generating capacity.

GDP growth rate as at third quarter ended September 2013 GDP growth rate as at third quarter ended September 2013

Source: National Bureau of Statistics Source: National Bureau of Statistics

MorganCapital Group

3, Biaduo Street, Off Keffi Street, S/West Ikoyi,

Lagos.

Tel: 234-(1) 3429613, 234-(1) 4540114

www.morgancapitalgroup.com

...leading the Global Investment Path to Africa TM

THE NIGERIAN ECONOMY, THE

CAPITAL MARKET, BANKS & THE

CRR HIKE TO 75%, AND THE

OUTLOOK FOR 2014: the first twist

unravels as the CBN governor marks

time

0.0%

2.0%

4.0%

6.0%

8.0%

Nigeria Ghana SouthAfrica

Kenya Malawi Angola Egypt

6.8%

3.9%

0.7%

4.4% 5.0%

7.4%

2.3%

GDP GROWTH RATE

0.0%

2.0%

4.0%

6.0%

8.0%

Nigeria China Malaysia Brazil Mexico Indonesia Turkey

6.8%

7.8%

1.7% 2.2%

0.8%

3.0%

4.4%

GDP GROWTH RATE

mailto:[email protected]



http://www.morgancapitalgroup.com/

MorganCapital Research www.morgancapitalgroup.com Equity Research Nigeria

Sore spots in the Economy in 2013

The Boko Haram insurgency was yet again a major glitch in 2013, a situation which

necessitated the declaration of a state of emergency by the presidency in three major

states in the northern part of the Country (Borno, Adamawa and Yobe).

Niger-Delta Militants resurfaced resulting in oil theft and vandalism. The effect of

this was a proliferation of illegal crude oil refineries and huge loss in oil revenue for

the Government.

High rate of corruption and fiscal irresponsibility. The case of the N225million car

scandal that rocked the aviation ministry comes to mind among others.

Crude oil Prices (Bonny Light) experienced some volatility particularly in the

second quarter of 2013

Inflation stepped up a notch in November mainly due to higher food price during the period. Inflation was at its lowest point (in more than 5years) in

October at 7.8%, an implication of the tight monetary stance of the CBN Governor. Inflation rate has averaged 10.43% from 2006 to 2013

Source: Central Bank of Nigeria; MorganCapital Research.

Crude Oil volatility at its peak in Q2 2013 Domestic Crude oil production was at its lowest level in June

Source: Nigerian National Petroleum Corporation& Reuters. Values are in US$/Barrel Source: Nigerian National Petroleum Corporation & Reuters.

Production volumes are in Million Barrels per Day (MBD)

The Nigerian Capital Market in 2013:- and the bulls came to play

The Nigerian Capital Market also scored highly in 2013, taking a cue from the positive

news out of the economy. The All Share index rose by 44.6%, closing the year at 41,329.19.

The Nigerian Stock Exchange was one of the best performing Bourses in Africa in 2013 and

was only outperformed by Ghana Stock Exchange.

Jan Feb Mar Apr May Jun Jul Aug Sep

115.24 118.81 112.79 105.55 106.00 106.06 109.78 107.84 113.59

115.24

118.81

112.79

105.55

106.00

106.06

109.78107.84

113.59

95.00

100.00

105.00

110.00

115.00

120.00

CRUDE OIL PRICE (Bonny Light)

Jan Feb Mar Apr May Jun Jul Aug Sep

2.23 2.23 2.20 2.24 2.06 2.03 2.2 2.29 2.29

2.23 2.23

2.20

2.24

2.06

2.03

2.2

2.29 2.29

1.90

1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

2.35

Crude Oil Domestic Production

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

9.00 9.50 8.60 9.10 9.00 8.40 8.7 8.2 8.00 7.80 7.90

9.00 9.50

8.60

9.109.00

8.40 8.78.2 8.00 7.80 7.90

0.00

2.00

4.00

6.00

8.00

10.00

Nigerian Inflation Trend in 2013


The impact of positive economic news on the market was clear for all to see when on the

conclusion of the sale of power plants to the preferred bidders, the share prices of listed

Companies that are exposed to the power sector rose astronomically. Companies like Forte

Oil which acquired the Geregu Power Plant and Transnational Incorporated (Transcorp)

which acquired the Ugheli Power Plant, recorded share price appreciations of over 1300%

and 270% respectively, placing them in the league of top 5 performing stocks for 2013.

On the flip side however, banking stocks bore the brunt of the tough monetary policy stance

of the Central Bank Governor as the hike in Cash Reserve Ratio (CRR) for public sector

deposit from 12% to 50% impaired the capacity of a lot of the banks to grow their revenue

and profitability particularly in the third quarter ended September 2013. The effect was

erosion in share price value and the banking sector index took a nose dive during the period

(click on the link to read our report on the impact of CCR hike on Nigerian Banks

http://morgancapitalgroup.com/pdf/morgan_capital_equity_research_impactof_crr.docx_

.pdf )

However, the sector managed some recoveries towards the close of the year because of the

expectation of year-end dividend/bonus declaration of banks with rich dividend payout

history. Banks like Zenith Bank, GT Bank, UBA, Stanbic IBTC etc all recorded strong price

movements in the course of the year especially in the fourth quarter.

The Stocks of bellwethers like Nigerian Breweries, Guinness, Dangote Cement, Nestle UAC,

Unilever, and Julius Berger also managed strong growths in the course of the year to ensure

that the Stock Market continued its march towards pre 2008 recession recovery. Other stocks

like Fidson, Cadbury, Oando and NASCON also closed the year strongly.

The Nigerian Stock Market also gained some traction in 2013 as the relative Economic

growth and Stability during the year attracted a lot of foreign investors into the market with

foreign investors accounting for around 52% of the total market for the most of 2013. The

major incentive for the influx of investors from America, Europe and China expectedly is the

enormous growth potentials in emerging market. The US FTSE closed year 2013 with a 13%

growth, but when compared to the 44% returns of the NSE and the 44.8% returns of the

Ghana Stock Exchange, it is clear to see where the growth potential is.

0.0%

20.0%

40.0%

60.0%

80.0%79.0%

47.2%43.0%41.7% 40.6%33.6%

25.5% 24.2%21.0%15.5%

African Stock Market Performance in 2013




The revitalized second tier securities market which was renamed the Alternative Securities

Exchange Market (ASeM) also saw some activities in the course of 2013 with the opening of

the first straight equity IPO in the capital market since the recession in 2008. This has given

impetus to the IPO market and the ASeM as more investors and institutions have signified

their interest in raising capital through ASeM platform.

Economic Outlook 2014

2014 is already warming up to be an eventful one with major economic events scheduled

to take place. Some of the major talking points in the economy are listed below

Exit/Selection of a new CBN Governor/new Monetary Policy Committee

members; this is clearly one of the major events of 2014 as the entire monetary

policy make-up of the country in 2014 will be determined by this singular selection.

The current CBN governor has left no one in doubt about his tight monetary policy

stance with the retention of the bench mark rate at 12% even though a lot of

analysts and economic watchers thought that a slight loosing of the rate

particularly in the second quarter of 2013 when lending rates by banks were

considered very high, was in order, the CBN Governor jacked up the cash reserve

ratio for public sector deposits from 12% to 50%. The CRR has now been moved to

75% as expected in our previous reports.

Rise in money supply due to pre-election Spending: as it is customary during the

election period is one of the first major challenges that the new CBN Governor is

expected to tackle in the very short term of his appointment, in other to curtail the

effect of potential rise in inflation.

Potential threat to security. The unending political drama which has seen many

prominent members of the People’s Democratic Party (PDP) decamp to the

opposition All Progressive Congress (APC) just a few months to the 2015 General

Elections is bound to heat up the polity as the previously predictable political

climate suddenly becomes unpredictable.

The further hike in the Cash Reserve ratio of Banks for public sector deposit;

The CBN in the first monetary policy meeting of 2014 increased the CRR from 50%

to 75% as more monies are expected to leave the government treasury and make

their way into bank coffers triggered by the rise in pre-election spending. This hike

is one of the last grasp of the CBN governor to ensure monetary policy stability

especially as he is due to leave office in June 2014.


Impact of US tapering on the Nigerian Economy; The Federal Reserve has announced

that it will start tapering its massive stimulus program in January2014. The likely effect

of the Federal Reserve tapering is the outflow of funds from emerging markets like

Nigeria which will put some pressure on the Capital Market in the short term

Forecast for key indicators in 2014

Economic

Indicator

Forecast

Range

Inflation

GDP growth

MPR

7.5% - 10%

7%- 7.2%

12%(H1-2014)

Source: MorganCapital Research

The Capital Market in 2014

The Nigerian Stock Market is expected to continue its path to recovery in 2014. The NSE all-

share index is expected to inch closer to the pre-recession era of 60,000 by the end of 2014. We

also expect the newly restructured 2nd-tier securities exchange market, now known as the

Alternative Securities Exchange Market (ASeM) to become a lot more active given the

renewed interest of business Organizations, particularly the Small and Medium Scale

Businesses, who wish to fund their business expansion plans through public offerings on the

ASeM platform. The ASeM has become a veritable platform for capital raising for business

organizations and this growing interest was confirmed when the first straight equity IPO which

raised N2billion for Omoluabi Savings and Loans PLC to recapitalize the primary mortgage

institution (PMI) and meet the new CBN capital base requirement for PMI’s was raised through

ASeM in the twilight of 2013. It is on reliable authority that the market will also be very active

in the First quarter of 2014 as an IPO by McNichols Consolidated [NSE: MCHNICHOLS] has

already been filed with the SEC for approval.

SECTORS TO WATCH IN 2014

The Key sectors to look out for in 2014 particularly as it concerns how favorably the economy

will be disposed to such sectors in 2014 includes


The Power Sector

The Federal Government of Nigeria in the Second quarter of 2013 announced the timeline for

the privatization of the power sector. The privatization process involved the unbundling of

the Power Holding Company of Nigeria (PHCN) into 15 independent companies comprising

5 Generating Companies (GENCO’S) and 10 Distribution Companies (DISCO’S). On The 30th

of September, the preferred bidders who met the August 21st 2013 payment deadline had the

assets transferred to them.

This has set the pace for the reinvigoration of the power sector which has suffered long years of

neglect.

The impact of this news was felt in the capital market as the stock two companies listed on the

Nigerian Stock Exchange which acquired two of the GENCO’s appreciated significantly in value.

Going into 2014, it is our expectation that more of the GENCO’s and the DISCO’s will approach

the capital market to raise capital as they attempt to take on the hugely capital intensive business

of generating and distributing power to the over 170million Nigerians and businesses. This

sector is certainly a place to watch because of the extremely vital role that the sector plays in

economic development.

Challenges in the Sector

Unavailability of sufficient gas to power the generating plants

Slow/almost non-existent investment by the DISCO’s to upgrade distribution channels &

capacity

The uncertainty of whether or not the NERC will stick to the rules and model for tariff

calculation/adjustment as stated in the bidding documents

Unavailability of adequate transmission capacity

Most DISCO’s are realizing that there is no power to sell both now and probably into the

medium term.

Construction/Building Materials Sector

In line with the Federal Government’s resolve of ensuring that Nigeria becomes one of the top

economies in 2020, infrastructural development is a major factor towards achieving this. The

massive infrastructural decay in the country which is currently the case puts companies in this sector

in pole position to out-perform in 2014. The 2nd Niger Bridge has received a lot of attention lately; the

Lagos Ibadan express way reconstruction and other construction projects may just as yet see the light

of day especially as we draw closer to the 2015 general elections. The positive reforms in the

mortgage industry which has seen the creation of the Nigerian Mortgage Refinancing

Company to create liquidity by providing access to cheap funds will drive a lot of building

activities and boost the construction/building material sector.


Oil and Gas Sector

The huge dependence of the country on this sector makes a compelling case for the sector on

this list.

The downstream sector remains partly deregulated which makes it unattractive for full private

sector participation as the Government still holds the aces price determination which is a major

disincentive for investors.

The inability of the House of assembly to pass the Petroleum Industry Bill (PIB) into law has

also slowed down the growth potential in the sector as more and more international oil firms

shut down/sell off their Nigerian businesses rather than invest in them. The activities of the

militants in the Niger Delta who destroy oil pipelines and engage in oil bunkering and illegal

refineries certainly doesn’t help the cause of the oil companies and the entire sector.

Despite all the unresolved issues in the sector, the economic relevance of the product makes the

sector one to watch out for in 2014. The NSE Oil and Gas index which tracks the performance of

all oil and gas companies on the Nigerian Bourse was the best performing sector in 2013,

returning over 120% in the course of the year. The sector performance was triggered by strong

movements in the share prices of Forte Oil (FO) which returned over 1300%, Conoil which

returned over 230%, MRS which returned of 129% and Oando which returned over 120%.

31 marginal fields would be offered in 2014 and the last time that this was done in Nigeria was

10years ago. Also the proposed refinery estimated at $9bn to be built by billionaire

businessman Alhaji Aliko Dangote which will bring Nigeria’s refining capacity to 450,000

barrels per day and will also give a huge boost to the sector going forward

Source: NSE; MorganCapital Research, NSE.

-50.0%

0.0%

50.0%

100.0%

150.0%122.3%

42.8% 81.4% 61.8% 47.2% 31.9% 31.1% 29.0%

-0.2

NSE Sectoral Indicies Perfomance in 2013


Consumer Goods (Brewery)

The affinity of the average Nigerian family for elaborate celebrations and the demographic mass

of the country puts the brewery sector in a position of advantage. The sector enjoys huge

patronage virtually all through the year and makes brewery companies some of the most

profitable companies on the Nigerian Exchange. Major international brands like Heineken,

Diageo and SAB miller are currently associated with the sector in the country and many more are

likely to come on board because of the huge potential for growth and profitability in the Nigerian

Brewery Sector. 2013 saw a stronger growth in low end Spirit/Gin market compared with the

premium brands. We adduce this to a rapid change in taste triggered by low purchasing power

of the average consumer.

Going forward, we expect the growth in the brewery sector to come from the low end market

and we see more of the premium brands developing more aggressive strategies to capture the

opportunities in that space. The Consumer goods sector grew by 31.1% in 2013 driven by

growths in Cadbury which grew by 109.9%, International Breweries (which is a lower end beer

brewer) which grew by 79.01% and Dangote Sugar which grew by 78.85%.

Stocks to watch in 2014

Dangote Cement

Currently the most capitalized Company in the Nigerian Stock Market with a market

capitalization of $23.43billion dollars. Dangote Cement has invested hugely in capacity

expansion and currently enjoys over 62% of the total cement market in Nigeria and has

expanded beyond the shores of the country into South Africa, Tanzania, Senegal, Congo

Brazzaville, Ethiopia, Kenya and Zambia. The Company’s key market strengths are as

follows

Rapid urbanization and housing needs

5-year tax break for new factories which boosts profitability

Adequate limestone and other resources

Population of over 170 million

Housing deficits


Third Quarter (Q3 -2013) Performance

The Company managed a 28% growth in revenue and a 47% growth in profit after tax for

the period ended 30th September 2013. See link

http://morgancapitalgroup.com/pdf/morgan_capital_equity_research__dangcem__9m_mo

nths_2013.pdf

The Company has a solid cash-flow and has maintained a funding structure of 60% equity

to 40% debt despite its huge investment in capacity which shows depth and strong

potential for sustainable growth going forward

DANGOTE CEMENT

2010 2011 2012 2013(F) 2014(F)

MARKET CAPITALIZATION (N'm) ($) 12,392 11,070 13,643 25,252 29,518

GROSS REVENUE (N'm) 202,565 241,405 298,454 364,110 436,932

PROFIT B/F TAX 101,051 113,779 135,647 201,921 235,943

TAX 5,270 7,635 16,285 0 0

PROFIT AFTER TAX 106,321 121,414 151,932 201,921 235,943

EARNINGS PER SHARE (EPS) 6.86 7.84 8.92 11.85 13.85

PRICE-EARNINGS RATIO 17.48 14.13 14.37 20.01 20.01

SHARE CAPITAL 7,745 7,745 8,520 8,520 8,520

OUSTANDING SHARES (M'n) 15,490 15,490 17,040 17,040 17,040

OWNERS' EQUITY 211,509 290,370 420,001 483,001 555,451

CASH DIVIDEND 425K 125K 300K 450k 554k

SCRIP DIVIDEND Nil 1 for 10 NIL NIL NIL

RELEASE DATE 23/03/11 20/04/12 22/04/13

AGM DATE 26/05/11 24/05/12 23/05/13

CLOSURE DATE 03/05/11 05/11/12 05/03/13

PAYMENT DATE 01/06/11 06/01/12 06/03/13

Oando Plc

Oando Plc is one of the Stocks to watch out for in 2014. The Stock returned over 130%

within the last two months of 2013, riding on the news of the expected completion of the

acquisition of the Nigerian assets of Conoco-Philips before the end of the first quarter of

2014. In our H1 -2013 review of the Company’s financial performance, a report we aptly

titled: Oando-to be or not to be, we raised some very salient points about some

fundamental issues we noticed in the Company’s financials ranging from how highly

geared the Company is to the potential share dilution on account of the right issue and so

on (click on the link for our H1-2013 report of Oando)

http://morgancapitalgroup.com/pdf/Morgan_capital_equity_research_oando.pdf )

http://morgancapitalgroup.com/pdf/morgan_capital_equity_research__dangcem__9m_months_2013.pdf

http://morgancapitalgroup.com/pdf/morgan_capital_equity_research__dangcem__9m_months_2013.pdf

http://morgancapitalgroup.com/pdf/Morgan_capital_equity_research_oando.pdf


Third Quarter (Q3 -2013) Performance

The third quarter performance ended September 30th 2013 of the Company showed

anything but comfort for the investors of Oando as revenue declined by 26% while

the net income declined by 52%. However, it can be argued that the value of the

Company is in its forward potentials and not on current performance particularly

after the completion of the acquisition. So, like we have aptly put it in our report

(to be or not to be) we look forward to how this plays out going forward.

2010 2011 2012 2013(F)

MARKET CAPITALIZATION (N'm) ($) 1,001 323 527 553

REVENUE (N'm) 378,925 571,305 673,182 740,499

PROFIT B/F TAX 24,318 12,965 17,554 18,512

TAX 9,943 11,252 6,767 7,405

PROFIT AFTER TAX 14,374 1,712 10,786 11,107

EARNINGS PER SHARE (EPS) 6.32 0.75 1.58 1.63

PRICE-EARNINGS RATIO 10.44 29.22 7.81 7.19

TOTAL ASSETS 324,022 405,644 516,904 775,356

TOTAL DEBT 147,368 206,005 288,885 416,885

DEBT-EQUITY 158.38% 222.07% 274.20% 359.73%

SHARE CAPITAL 15,698 15,698 15,698 15,698

OUSTANDING SHARES (M'n) 2,274 2,274 6,822 6,822

OWNERS' EQUITY 93,049 92,764 105,354 115,887

CASH DIVIDEND N3.00 NIL 75k 75K

SCRIP DIVIDEND 1 FOR 4 NIL NIL

RELEASE DATE 21/03/11 09/03/12 41,611

AGM DATE 15/04/11 03/04/12 24/04/13

CLOSURE DATE 05/04/11 23/03/12 15/04/13

PAYMENT DATE 15/04/11 05/04/12 24/04/13

Transnational Incorporated (TRANSCORP)

Transcorp as it is often called is clearly one of the stocks to watch out for in 2014.

The price of the stock was literarily stagnant at 50K for a long period of time, after

the Stock lost value not too long after it was listed on the Nigerian Bourse for

issues bordering on corporate governance. The Stock found some lease of life

when Tony Elumelu’s (former MD of UBA) Heirs Foundation started mopping up

the shares of the Company. However, the major news that triggered a

.


massive rally in the share price of the Company was its acquisition of the Ugheli

Power Plant during the just concluded privatization of the Nigerian power sector.

The Company has returned over 270% since that acquisition and is posed to rally

even stronger as the new management gets down to the business of efficiently

running the conglomerate profitably

Mcnichols Consolidated PLC

One of the Companies already listed on the ASeM platform, Mcnichols is an e

merging food and beverage giant. The Company is currently expanding capacity

and may be the Company that kick starts the IPO market on the ASeM platform

in 2014. The Company is currently the only indigenous Company that produces

cubed sugar in Nigeria and saw its market share widen significantly in that

market space with the Federal Governments directive to ban the importation of

St Louis sugar into the country. Going forward, we expect the Company to

conclude the IPO process by February/March and to raise enough funds to

consolidate on its growing market share. Mcnichols is certainly one of the stocks

that will shape the Nigerian Capital Market in 2014 being the potential first IPO

in 2014 and enormous potentials inherent in the Company. The Company

returned 42.86% in 2013

Sectors potentially in the eye of the storm

The year 2014 is expected to be event filled. Having focused on some of the sectors that

have the potential to perform well in the course of the year, it becomes imperative to

also take a peek at sectors that may potentially take the fall for some of the rapid

changes that will happen in 2014. The first sector in this adversity report is;


The Banking Sector

The Banking Sector is a very strategic sector in any economy particularly as it pertains to

efficient implementation of monetary policies. Banks, in the course of discharging their

primary roles as financial intermediaries from an area of surplus to an area of deficit to

finance development projects, make themselves susceptible to the vagaries of harsh

monetary policies, as is currently the case.

The CBN in its quest towards ensuring monetary policy stability and keep inflation

within manageable bands maintained the benchmark MPR at 12% for the most part of

2013 and Banks responded aptly by adjusting their lending rates upwards. The effect of

this was the unavailability of credit worthy projects particularly for Small and Medium

Scale businesses as the interest on credits could literarily kill their already struggling

businesses. Consequently, Banks shifted focus from credit extension to investment in

treasury bills and Government bonds in an attempt to efficiently deploy the fast swelling

liability side of their balance sheet.

However, the Banks got a taste of their own medicine when the CBN Governor

announced a further hike in Cash Reserve Ratio (CRR) for all public sector deposit from

50% to 75% in the first monetary policy committee meeting of 2014 and, considering the

effect of the hike to 50% in the Q3-2013 earnings, we expect the banks especially the ones

with big exposures to struggle with the growth of their revenue and profit.

How the Banks fared in Q3 -2013 (the first quarter after Public sector CRR hike from

12% to 50%)

UBA

Year on Year Quarter on Quarter

9mth -2013

[N'm]

9mth -2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 188,021 167,070 12.54 62,040 63,216 -1.86 62,765

PAT 37,371 36,498 2.39 8,962 12,847 -30.24 15,562

SKYE BANK


9mth -2013

[N'm]

9mth -2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 102,044 94,131 8.41 30,875 36,477 -15.36 34,692

PAT 11,650 13,229 -11.94 3,214 4,729 -32.04 3,707


STERLING BANK


9mth -2013

[N'm]

9mth -2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 65,120 49,559 31.40 23,265 22,011 5.70 19,844

PAT 4,808 4,593 4.68 -687 2,834 -124.24 2,661

ACCESS BANK


9mth -2013

[N'm]

9mth -2013

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 154,427 160,393 -3.72 50,300 53,418 -5.84 50,709

PAT 27,718 34,679 -20.07 7,004 10,798 -35.14 9,916

GT BANK


9mth -2013

[N'm]

9mth-2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 181,989 166,489 9.31 57,787 60,630 -4.69 63,572

PAT 72,456 63,223 14.60 20,665 29,607 -30.20 22,184

ZENITH BANK


9mth -2013

[N'm]

9mth -2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 255,299 229,161 11.00 84,275 84,050 0.23 86,977

PAT 68,854 60,941 13.00 24,330 22,010 10.54 23,408

FIDELITY BANK


9mth -2013

[N'm]

9mth -2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 92,784 81,799 13.43 29,880 31,472 -5.06 31,432

PAT 11,064 12,840 -13.83 2,000 4,314 -53.64 4,750

Evidently, a look at the Q3 -2013 performance of the respective Banks above

confirms that the Banks struggled in the in the third quarter which was their first

earnings release after the public sector CRR hike.

However, two Banks showed some resistance to the effect of the CRR hike in their Q3 -

2013 and recorded marginal improvements in earnings, as shown in the tables below:

STANBIC IBTC BANK


9mth -2013

[N'm]

9mth -2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 82,921 64,030 29.50 28,412 27,923 1.75 26,586

PAT 16,057 6,997 129.48 6,799 5,685 19.60 3,573

DIAMOND BANK


9mth -2013

[N'm]

9mth -2012

[N'm] %

Q3 -2013

[N'm]

Q2 -2013

[N'm] %

Q1 -2013

[N'm]

Revenue 127,811 105,307 21.37 44,010 44,384 -0.84 39,417

PAT 20,050 18,170 10.35 7,407 6,340 16.83 6,289

Source: MorganCapital Research


In our report on the impact of the CRR hike on Nigerian Banks published on the 29th of

November 2013, it was our verdict that Banks needed to develop and implement

aggressive retail strategies and this was clearly evident on the minimal impact the CRR

hike had on Diamond Bank, being one of the most retail focused Banks in Nigeria.

Hike of public sector funds CRR to 75%; Impact on Banks

2014 is the penultimate year to the election year and as is typical in Nigeria; we expect

a rise in money supply due to pre-election spending which will trigger inflationary

trends.

The CBN Governor Sanusi Lamido Sanusi has all but dedicated his tenure towards

ensuring that inflation in Nigeria is kept within manageable band and has employed

all resources at his disposal towards achieving this. The CBN Governor’s resolve has

helped inflation to reach its lowest point in 5years (7.8%) in October 2013.

By June 2014, Sanusi Lamido Sanusi will exit the Governorship Position of the CBN to

pave way for the selection of a new CBN Governor who may or may not continue with

the tough monetary policy stance of Sanusi. There are 3 major reasons to support the

hike in CRR to 75% and these are:

To curtail the potential inflow of funds from Government to Banks and the

economy which will heighten inflationary trends

To preserve his legacy of maintaining a strong hold on inflation which is one of

his accomplishments

To maintain exchange rate stability

Given the CRR hike to 75% and judging from the impact of the hike to 50% in the third

quarter performance of the Banks, it is safe to say that the Nigerian Banks may be in for

some torrid times in the twilight of the current CBN Governor’s tenure. The table

below shows the price impact of the CRR Hike on the share prices of Banking Stocks

on the Nigerian Bourse, a situation which may likely replay itself in the coming weeks.


B ank

Sock price

as at t he last

t rad ing day

bef ore t he hike

St ock price as at one

and half mont hs af t er

Q3 2 0 13 result s were

released .( 2 9 / 11/ 2 0 13 )

Percent age

C hange

Guaranty Trust Bank 26.42 27.30 3.33

Zenith Bank 21.60 21.30 -1.39

FBNH 18.65 16.11 -13.62

UBA 8.34 7.51 -9.95

Access Bank 11.19 10.00 -10.63

Stanbic 15.45 19.50 26.21

Diamond Bank 6.90 7.00 1.45

Fidelity Bank 3.10 2.67 -13.87

Skye Bank 4.81 3.98 -17.26

Constrained Earnings in 2014 due to the hike in CRR to 75%

The hike in CRR to 75% will further constrain the interest generating capacity of Banks and

this situation is worsened by the lukewarm disposition of Nigerian Banks towards credit

extension to the real sector. This consequently narrows the earnings scope at least for the

first two quarters of 2014 to Bonds and other fixed income investments.

The table below shows our earnings estimates for 2013 and our projections for 2014 given

the recent CRR hike to 75%

BANK

NUMBER OF

SHARES

[N'000]

CURRENT

SHARE

PRICE

MARKET

CAPITALIZATION

[N]

MARKET

CAPITALIZATION

[$]

EPS

2013E

[N]

@ 50%

CRR

EPS

2014F

Adjusted

for hike

in CRR to

75%

Access Bank 22,882,918,908 9.60 219,676,021,517 1,372,975,134 1.52 1.22

Diamond Bank 14,475,243,105 7.75 112,183,134,064 701,144,588 1.90 2.04

FBNH 32,632,084,356 15.45 504,165,703,300 3,151,035,646 2.75 2.52

Fidelity Bank 28,974,797,023 2.63 76,203,716,170 476,273,226 0.45 0.27

Guaranty Trust Bank 29,431,179,224 28.30 832,902,372,039 5,205,639,825 3.20 2.81

Skye Bank 13,219,334,676 4.56 60,280,166,123 376,751,038 1.12 0.97

Stanbic 10,000,000,000 21.50 215,000,000,000 1,343,750,000 2.30 2.72

UBA 32,981,387,566 9.00 296,832,488,094 1,855,203,051 1.39 1.08

Zenith Bank 31,396,493,786 23.20 728,398,655,835 4,552,491,599 3.18 3.10

On the back of the expected relatively slower growth in year on year earnings of Banks in

2014 fiscal year, we expect to see some pressure on Banking Stocks in 2014. We hope that

the Banks will strive towards ensuring the hike becomes an earnings catalyst this time and

not a clog like in the Q3-2013.


Our projections for 2013 & 2014

Source: MorganCapital Research; *P/E at current prices

Our verdict for the market in 2014

Despite the optimistic outlook for 2014, we expect some sell pressure on the market

particularly in the first half of the year due to the uncertainties surrounding the exit

/selection of the new CBN Governor. The policy direction of the incoming CBN Governor

will go a long way in dictating the direction of the market afterwards. Also with the

General elections lurking around the corner (2015), the market will also bear the brunt of

the increased spending activities of the politicians and we are likely to witness a huge sell

pressure particularly in the third quarter when campaigns will be in full swing as more

money leaves the capital market and floats into the economy; coupled with general

uncertainties in the polity.

Company

Price as at

20-01-14

eps

2012

eps

2013F

eps

2014F

P/E*

(2013)

P/E*

(2014)

Access Bank 9.88 1.68 1.52 1.22 6.5 8.1

Dangote Cement 225.02 8.78 11.85 14.50 19.0 15.5

Dangote Sugar 12.00 0.90 1.1 1.26 10.9 9.5

Diamond Bank 7.84 1.50 1.90 2.04 4.1 3.8

Fidelity Bank 2.55 0.63 0.45 0.27 5.7 9.4

Fidson 2.69 0.14 0.36 0.45 7.5 6.0

FirstBank 15.80 2.33 2.20 2.52 7.2 6.3

GTBank 28.24 3.06 3.20 2.81 8.8 10.0

Julius Berger 65.10 6.83 6.83 7.06 9.5 9.2

NASCON 14.00 1.04 1.12 1.28 12.5 10.9

NB 166.20 5.03 5.28 5.58 31.5 29.8

Nestle 1155.05 26.29 30.51 36.37 37.9 31.8

Oando 26.70 1.58 1.03 1.35 25.9 19.8

Skye Bank 4.40 0.95 1.12 0.97 3.9 4.5

Stanbic 22.02 2.30 2.72 9.6 8.1

Total 180.00 14.04 15.11 17.42 11.9 10.3

UACN 69.00 2.56 2.65 2.72 26.0 25.4

UBA 8.93 1.77 1.39 1.08 6.4 8.3

WAPCO 115.00 4.90 8.50 6.05 13.5 19.0

Zenith Bank 24.86 3.19 3.18 3.10 7.8 8.0


DISCLOSURE

Certification

Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the investments or issuers to which the

report relates, and no part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or

corporate finance transactions expressed in the report.

Conflict of Interest

MorganCapital Securities Ltd and its sister companies within the MorganCapital Group may execute transactions in securities of companies mentioned

in this document and may also perform or seek to perform investment banking services for those companies mentioned herein. Trading desks may

trade, or have traded, as principal on the basis of the research analyst(s) views and report(s).

Disclaimer

The contents of this report are obtained from publicly available sources and in good faith but no representation or warranty, either express or implied,

are made to its accuracy or completeness. This report is not an offer to buy or sell or a solicitation to buy or sell securities, where mentioned. This

report is distributed (through e-mails) in the United States, Europe, Asia and Africa by MorganCapital Securities Limited and its Sister Companies

within the MorganCapital Group all operating in Lagos, for general circulation only. The opinions and recommendations herein do not take into

account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or

strategies to specific clients. The financial instruments discussed in this report may not be suitable for all investors thus investors must make their own

investment decisions based upon their specific financial situations, investment horizons and investment objectives. If a financial instrument is

denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the price or value of, or the income

derived from, the financial instrument, such an investor effectively assumes currency risk. In addition, income from an investment may fluctuate and

the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not

necessarily indicative of future results thus this document must not be acted on or relied upon by persons who are not Relevant Persons, as defined in

the paragraph below. Any investment or investment activity to which this document relates is only available to Relevant Persons and will be engaged

in only with relevant persons.

TM +234-8107596134 +234-1-2714713-4

Documents