Outlook for banking stocks

Earnings reports for the operations in 2014 have begun to reach the market and performance generally can be expected to reflect the difficult conditions in which banks traded last year. The reports yet to be released are expected to follow the same pattern of slow growth in both revenue and profit, which is the summary of reports issued so far.

Revenue growth was generally constrained by regulatory policies that closed significant income lines for banks during the year. The tight regulatory environment overcharged the competitive space, which warranted massive cost cutting measures. Bank strategists had to implement new approaches to reduce the cost-income ratio and this was a general move by banks during the year.

One operating story can be expected to cut across all banks in 2014 and that is cost cutting, which was about the only option to avert the threat of profit collapse in a situation of inability to grow revenue. Only a few banks may be able to show accelerated growth in revenue as the anchor to improve profit in 2014.

In view of the constraint in growing revenue, the effort to grow profit by cutting cost appears to have had a limited impact. Despite the cost cutting bandwagon, the general earnings picture of banks in 2014 is looking tattered. New profit highs will be difficult to attain and the best that can be expected will be some recoveries from a previous drop. This holds slim prospects for dividend improvements and equally a cautious optimism for share price advances.

Access Bank Plc is expected to regain earnings growth momentum with the 2014 operations. Compared with the preceding year when revenue was flat and profit declined, an accelerated growth in revenue is expected and profit growth is also expected to resume in 2014. Herbert Wigwe (pictured), the new group chief executive officer of the bank, looks very likely to take the bank’s profit to a new peak in his first year in office.

At the end of the third quarter operations, after tax profit was almost at par with the full year figure in 2013. His major accomplishment in 2014, as seen in the interim reports, is a cut down in the cost-income ratio of the bank. Income lines accelerated while cost elements slowed down. With that, he improved profit margin, which is a feat in a tight cost-income situation that banks faced generally in 2014.

Ecobank Inc is expected to make a sharp earnings u-turn in 2014 and finish with a major profit recovery. The bank’s management is expected to reverse the drop in profit in the preceding year. At the end of September, after tax profit was already more than double the full year figure in 2013. One of the most outstanding profit advances from the banking sector in 2014 can therefore be expected from Ecobank.

Albert Essien, group chief executive officer of the bank, points to the lowering of the cost-income ratio as his major accomplishment in 2014. This constitutes a major element of operational improvements he has made in the business. The significantly increased earnings growth momentum is the reward for the strategic changes that has led to the attainment of efficiency. The result is the improvement in profit margin and consequently the high profit recovery and growth expected.

FBN Holdings Plc improved revenue growth momentum in the course of 2014 operations but profit outlook indicates a weak growth. The bank is therefore expected to step up revenue growth but in terms of profit performance, only a modest improvement may be possible in 2014. Two major expenditure lines eroded profit margin as per the interim reports, which caused a decline in profit as at September.

FBNH’s group managing director/chief executive officer, Mr. Bisi Onasanya, is still holding firmly the banking sector’s leadership in respect of asset base, which amounted to N4.19 trillion at the end of the third quarter. His bank however ranks below Ecobank in respect of gross earnings and well below Zenith Bank and GTB on profit numbers. The difference lies in the significantly lower net profit margin than the two banks.

First City Monument Bank Plc [FCMB] is expected to sustain growth in profit for the third year at the end of 2014 after returning to profitable operations in 2012. The bank succeeded in defending profit margin as per the interim results in 2014 though loan loss expenses claimed an increased proportion of revenue. Profit margin nevertheless remained quite ahead of the 2013 level.

Improved earnings report can therefore be expected from FCMB’s 2014 operations on account of a gain in profit margin and a reasonable growth in revenue. Stable growth in revenue has been a key strength of the bank over the years and that record is expected to be maintained for 2014. With the improvement in profit margin, the bank shows the strength to achieve accelerated growth in profit in 2014 compared with a moderate improvement in the preceding year.

Stanbic IBTC Holdings Plc continued on the high growth lane in 2014 and the bank is set to sustain high profit growth for the third year running. It is one of the few banks that defied the general earnings slow down in the banking industry as per the interim results. Banks generally have been losing profit margin since 2012 but Stanbic IBTC Holdings has made its biggest gains in margins during the same period.

Stanbic IBTC Holdings is the only bank that doubled profit in 2013 against a general slowdown and declines that happened in the year. The bank is again expected to achieve one of the highest profit growths likely in the banking sector in 2014.

Sola David-Borha, managing director/chief executive officer of the bank, made a strategic move in 2014, which is growing revenue ahead of cost. There was an all-round cost moderation in the year, which lifted profit margin to the highest level since 2009 – the second highest net profit margin in the banking sector.

To be continued next week