Absence of material FX revaluation gains to drag NIR
In 2023, most of our coverage banks recorded material FX revaluation gains; hence, we saw a significant jump in Non-Interest Revenue (NIR) for the period. Also, Commission and Fees Income recorded robust growth due to increasing transaction volumes via digital channels. In 2024, we project that NIR will decline as we do not expect FX revaluation gains for the year to be as much as what was witnessed in 2023. Meanwhile, banks with pocket FX revaluation gains will record stable growth in NIR as growth in Commission and Fees. Income will net of the gains from FX revaluation. Of note, we saw significant growth in our coverage banks digital businesses due to the innovation driven by our coverage banks to capture the transaction volumes in the payment space and other digital businesses dominated by FinTech companies, which in turn led to the growth in transaction volumes by most of our coverage banks. Similarly, we expect this trend to persist in 2024 as banks continue to fight for their market share with FinTech companies in the digital business space.
Capital Issuance to strengthen capital buffers
Following the speech of the CBN governor at the 56th Annual bankers’ dinner, where he stated that the CBN will be directing banks to increase their capital base in servicing the proposed $1 trillion economy in the near future. Also, additional capital strengthens their buffers, which in turn increases their capacity to absorb risk, expand their loan book and business operations which in turn impact their earnings and valuations. Of note, we have seen some banks (such as FBNH, FIDELITY and FCMB) strengthen their capital buffers before the disclosure was made public by the CBN Governor. Meanwhile, except FBNH, all of our tier I coverage banks’ Capital Adequacy Ratio is currently sitting comfortably above the regulatory requirement of 15%, with UBA recording the largest advancement in its CAR till date. Hence, in line with the CBN’s efforts to strengthen the capital base of Nigerian banks, we expect Nigerian banks to issue additional capital in response to what the CBN proposes next year. However, the CBN has not provided further details such as what the minimum capital will be in the future; therefore, we cannot quantify the impact wholistically as at the time of writing.
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What shaped the past week?
Equities: The week extended the New year’s rally in Nigerian equities (+4.24% w/w). The consumer goods sector closed the week with the highest gains (+9.60%), with CADBURY (+42.31%) mostly driving the sector’s gains. The Insurance index also closed on a high note (+7.63%) mostly driven by gains in VERITASKAP (+39.47%). Other sectors also closed on a positive note except for Oil & Gas (-1.61%) that closed the week in the red.
Fixed Income: The secondary market began the week with buoyant liquidity. This was significantly reduced by the OMO auction that was held during the week. DMO allocated ₦ 357 billion worth of bills. Hence, the OPR and Overnight rates ended the week higher closing at 16.58% and 17.80% respectively. Bullish sentiments were observed before and after the OMO and NTBs auction as investors sought to lock in present yields given lower yields at the auctions.
Currency: At the NAFEM, the Naira fell w/w to close at ₦890.54 per dollar.
As we expect Nigeria’s December inflation print in the coming week, we believe inflation rose above 29% due to year-end festivities and the sustained passthrough of high transport prices. For much of H1’24, inflation could remain above the 30% handle, driven by low base effects in the context of PMS pricing. Amid these expected pressures, the Central Bank hinted at the adoption of an inflation targeting framework at the Annual Banker’s Committee Dinner. Literature tells us that inflation targeting involves several elements, including the public announcement of medium-term targets for inflation, an information-inclusive approach with many variables (and not just monetary aggregates), increased transparency of monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers, and increased accountability of the central bank in attaining its inflation targets. A key side effect of an inflation targeting regime is output fluctuations as low economic growth could ensue from attempts to target inflation. This could adversely affect the ambitious goal of attaining a $1 trillion economy over the medium term.
Global: Asian-Pacific equities navigated a data-driven week, initially cautious ahead of regional inflation figures before rallying on easing Tokyo inflation and US CPI anticipation. The Nikkei soared to a 33-year high, while Hang Seng surged on Wall Street strength. South Korea’s central bank maintained rates, but Samsung’s profit dip dampened sentiment. Overall, regional markets ended mixed, reflecting diverse economic data and global influences.
US equities navigated a data-driven week, initially rallying on tech advances led by Nvidia’s record-breaking GPUs. However, anticipation of the December inflation print dampened sentiment, causing a pullback before the data’s mixed reception. Despite a slight rebound mid-week, concerns over future interest rate hikes lingered. The arrival of the first spot Bitcoin ETFs added a new dimension to the market landscape. Overall, the week reflected investor caution amidst key economic data releases and growing uncertainty about the Federal Reserve’s monetary policy trajectory.
European markets swung between optimism and anxiety this week, grappling with mixed economic data and global growth concerns. Early gains fueled by positive Eurozone confidence and German economic figures were countered by worries about a potential global slowdown, underscored by the World Bank’s grim forecast and Germany’s declining industrial production. Investors awaited earnings season with cautious optimism, bolstered by reassurances from central bank officials on both sides of the Channel. However, hotter-than-expected US inflation dashed hopes for an immediate easing of rate hikes and plunged European markets lower.
While UK GDP posted a positive monthly increase, France’s stagnant inflation offered little solace, leaving European equities in a precarious position at the week’s close.
What will shape markets in the coming week?
Equity market: The market returned 4.24% w/w compared to prior week’s 6.54%, as we saw some profit taking action this week. Also, given the strong close in the consumer goods sector, we are likely to see price correction in that space at the start of trading next week, while other sectors trade mix.
Fixed Income: At the start of the new week, we still expect some bullish trading sentiments in both markets.