What shaped the past week
Global Markets: Global markets opened higher on Monday, after Iran agreed to limit its nuclear program. Markets back tracked as U.S Consumer Confidence Index, which had decreased sharply in October, declined again in November to a seven-month low. Ahead of Thanksgiving holiday though, the S&P rallied, recording an all-time high of 1,807.23 points on Wednesday. European markets ended the week on a positive note, as Euro-area inflation stayed below 1 percent for a second month, and unemployment unexpectedly dropped to 12.1%.
Domestic Economy: According to the Director-General of the Securities and Exchange Commision (SEC), Mrs. Arunma Oteh, about $5.4 billion (NGN864 billion) Naira year-to-date has been invested in the bond market by foreign investors. Ms Oteh made this known at the 3rd Annual Capital Market Retreat tagged: “Actualizing Nigeria’s Economic Potential’’. She stated that the domestic bond market’s inclusion in Barclays’ emerging market bond index and JP Morgan local currency bond index has boosted investor interest, because prior to the October 2012 inclusion, foreign investors’ holding of Nigerian bonds was approximately 1.2 billion dollars (NGN192 billion). Ms Oteh also stated that the bond market could play an important role in improving the infrastructure of the country.
Equities: Mixed sentiments persisted on the NSE this past week, as the All-Share Index (ASI) opened on a weaker note, slipping 6bps with investors taking profit after the impressive 6-day rally. Market volumes moderated, recording an average daily turnover of NGN4 billion, a 31% decline from the week before. Consumer Goods, driven by NB and GUINNESS, advanced 65bps, 61bps and 28bps on Wednesday, Thursday and Friday respectively, rallying to a 1.25% WoW close. However, as sell pressure mounted on heavyweight Financials and Industrial Goods shares, the ASI shuttled between gains and losses, eventually closing flat (-2bps) on Friday, recording a 0.83% WoW loss.
Fixed Income: Market liquidity opened with a credit balance of NGN283 billion this past week. Despite this, interbank rates edged up at week open, by an average of 13bps. Eventually resting at 10.54% to 12.63% levels by week close. The Central Bank announced three consecutive OMO auctions – to combat the NGN330 billion of maturities injected into the system – eventually selling NGN 230 billion at week close. This caused a bearish trend in the T-bills market all week as yields rose an average of 9bps WoW with soft selling, particularly on the short term bills. The Bond market kicked off last week with in mild buying, particularly on the 7-year 16% FGN JUN 2019 maturity, which dipped 7bps on Monday. However, sentiments reversed, as the market went on to record four consecutive days of soft selling, with yields rising an average 5bps.
Currency: The CBN sold a total of $598.9 million at the week’s FX auctions, with stop rate of NGN155.73/USD. At the interbank market, the currency gained 36 kobo/USD to close the week at NGN158.30/USD, a 0.22% appreciation WoW.
What will shape markets in the coming week?
Although market volumes declined WoW, as per the holiday season trend, the cloud of profit taking seems to have passed. We predict a rebound in Financial Services and a positive close for the ASI at week open. With the system still in excess of NGN360 billion, we expect that activities will be driven by OMO auctions in the week ahead. As a result, we expect soft-selling to persist in the fixed income market especially as trading activities are expected to wind-down gradually as the year comes to an end. This suggests that in the absence of a market catalyst, traders will likely trade with cautious, waiting on the sidelines until there is clarity on the FG’s borrowing plans for 2014.
Focus for the week: DIAMOND BANK PLC: Q3’13 Earnings – High risk model paying off
- Annualized EPS beats estimates
- NIM contracts but remains competitive
- High risk model paying off
- Expect muted Q4 but still strong 2013 finish
- TP revised downward following model upgrade
Annualized EPS of N1.74 beats N1.67 Vetiva estimate: DIAMOND reported Q3’13 results on October 29 with annualized EPS (N1.74) beating Vetiva (N1.67) and Consensus (N1.64) estimates. The results showed a stable QoQ trend with Interest Income maintaining the N45 billion mark reported in Q2 whilst Profit After Tax (PAT) rose 17% QoQ to N7.4 billion, driven by stable expenses and lower tax provisions. Despite the strong QoQ net loan growth (up 9%), Fee and Commission income dipped 14% QoQ, possibly reflecting the impact of the reduction of Commission on Turnover (COT) by the Central Bank. The impact of regulatory directives is further seen in the balance sheet with the 52% QoQ jump in Cash and Balances with Central Banks and a 9% decline in Investment Securities which are reflective of DIAMOND’s compliance of the increase in the Cash Reserve Requirement (CRR) on public sector deposits from 12% to 50%; a development which negatively impacted DIAMOND’s earnings base during the quarter.
NIM contracts but remains competitive: DIAMOND’s Net Interest Margin (NIM) declined 20bps to 8.6% (Q2: 8.8%). We think this NIM decline would have been as a result of the restricted (none earning) cash balance with the CBN as a result of the CRR directive and the lower Yield on Assets (YoA) on some portfolios that may have been responsible for the loan growth during the quarter, largely high quality Oil & Gas obligors. DIAMOND’s overall YoA came in at 12%, a 134 bps decline QoQ. On a positive side though, Cost of Funds (CoF) improved by 10bps QoQ to 3.4% despite market wide pressure on that front. We note that at 8.6%, DIAMOND boasts one of the best NIM in the Nigerian banking industry; NIM averages 7% for Tier II banks and 8% for Tier I. We note that with a CASA (Current and Savings Account) to Term deposit split of 75%:25%, DIAMOND can sustain below peer CoF.
TP revised to N8.77 following model update: After updating our model and adjusting for this Q3 performance, we revise our 12-month Target price (TP) for DIAMOND to N8.77, BUY (Previous: N10.67, BUY). Although we have raised our EPS estimates after faster than expected loan growth in Q3’13, the TP revision was strongly influenced by higher Risk Free Rate (RFR), up to 12.7% (Previous: 11.2%) to reflect the current yield environment. Management has expressed optimism following its introduction of the Agent Banking Model-BETA product, specifically targeted at the unbanked population, as well as signing an agreement with Telco giant, MTN to further deepen retail penetration. We think these initiatives, if successful, could herald NIM recovery over the medium term but continue to pay attention to asset quality. Nonetheless, our long term view of DIAMOND is constructive given its highly profitable model. DIAMOND is trading at 2013E P/E and P/B of 4.2x and 0.8x compared to Banking sector averages of 6.3x and 1.4x respectively.