Babajide Okeowo
Analysts have predicted a fall in overall profit by deposit money banks this year, even as they predict a Gross Domestic Product (GDP) growth of 2.25%.
They hinged their pessimism about the banks on account of a likely stunted loan growth resulting from weak economy and the fact that they may gain from high T-bills yields.
Analysts in Coronation Research in their 2019 economic outlook report, titled: “A Tale of Two Halves”, believe that the performance of the Nigerian economy in 2019 will still be largely hinged around the performance of crude oil in the international market.
Guy Czatoryski, Head of Coronation Research, said: “We forecast an average $58.00 per barrel for 2019. An average much below this means the CBN will have to keep rates very high and could even challenge the Naira / US dollar exchange argument. An average much about US$60.00/bbl means the CBN will have confidence its reserve position, and will be able to cut rates later in the year, in Q4, less likely Q3.
Czatoryski said the current rate of N365.29/US$1, or close to it, is likely to prevail this year as CBN’s policy is to defend the rate and with reserves at $43.0bn, it is in a strong position to do so.
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“We think the CBN will supply US dollars to the FX markets at an average rate of US$500m per month during 2019. This is compatible with maintaining a strong reserve level
“If, as we think, the oil prices will average $58.00/bbl this year, then we think the CBN will want to keep interest rates high. It will do this through its open market operations (OMO). We think OMOs will be issued in a range of 17.00% to 19.00% and that T-bill rates will be very close to this level during 2019.
“We look at Nigeria in the international context of interest rates. Nigerian T-bill rates look competitive in the context of other emerging market rates – which is why the CBN is having success in attracting inflows of Foreign Portfolio Investment.”
“However, if oil trades at substantially above US$60.00/bbl during 2019 then foreign investors in T-bills will be encouraged and the CBN might well be in a position to cut rates in Q4 2019, or even in Q3 2019.
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“This could be helped by a downtrend in inflation. Inflation has proved stubborn and has trended at around 11.00% over the past few months. But if inflation trends, in 2019, towards the CBN’s target band of 6.00% to 9.00%, then it will help the CBN cut rates in order to stimulate the economy.”
According to the report, GDP growth is expected to be 2.25% in 2019, as a result of very weak consumer demand, and a lack of growth in government expenditure relative to the 2018 budget.
Banks are unlikely to post large gains in profits this year. They are unlikely to experience much loan growth, given the weak economy and the fact that they can benefit from high T-bill yields. On the other hand, bank stocks are cheap in historical terms. So, if interest rates come down later in the year and the market conditions improve, then there could be a sharp rally in bank stocks later in the year.
