OREANDA-NEWS. March 07, 2012. Renaissance Capital, the leading emerging markets investment bank, has issued a groundbreaking research report on Nigerian banks, arguing that that some significant positives have emerged over the past few years, with stocks in the banking industry having significant upside potential.

According to the report, Nigerian Banks: A whole new day, again, authored by Renaissance Capital’s head of Sub-Saharan Africa Research, Nothando Ndebele, share-price performance in the banking industry has been dismal; non-performing loans (NPL) and Asset Management Corporation of Nigeria (AMCON) write-offs continued throughout 2011, despite the banks having forecast a peak in NPLs in 2010. Analysts note that reported loan growth numbers from some players have been gravely disappointing in light of management guidance, and that the expected recovery in returns and profitability in 2011 was woefully unsatisfactory for many of Nigeria’s banks.

Despite this, the report argues that some significant positives have emerged over the past few years. First, Nigeria now has a stronger banking sector. Second, governance structures have been improved, and the new guidelines on the tenure of senior management, non-executive directors and auditors are a welcome change. Other positives highlighted in the report are the Central Bank of Nigeria (CBN) audit, followed by the creation of AMCON, which helped to contain the NPL contagion. Failed banks have been dealt with in a manner that has not threatened the viability of the entire sector. Reporting requirements have been improved, and provisioning policies tightened.

The report suggests that though the industry has been through some challenging phases, it has in other ways registered significant improvement and laid out the necessary foundation for better times ahead. Renaissance argues that key drivers of a recovery in share-price performance for the sector in 2012 will include asset quality in terms of the general health of loan books, capital issues in terms of the impact on banks’ capital bases and capital adequacy ratios (CAR) and the outlook for loan growth (which analysts estimate could reach 25-30% this year).

From a comparison perspective, the report looks at how the banks match up to each other, and assesses the impact of competition and consolidation on the sector – concluding that mergers are never easy and that forecasts for scale benefits and cost synergies are likely to take longer to come through than managements envision. It suggests that Access Bank appears ahead of the curve on this front.

In terms of sustainable returns and valuation, the report attempts to answer the all-important question: what should investors be paying for these banks? It examines banks’ long-term returns, and concludes that a fair number have averaged returns below their estimated cost of equity. Renaissance estimates P/Bs ranging from 0.3x (implying the lowest returns over time) to about 1.7x for the best performers; reinitiating coverage of Guaranty Trust Bank, Zenith Bank, FCMB, UBA and Diamond Bank at BUY while putting Access Bank, First Bank, Skye Bank, Fidelity Bank and Stanbic IBTC at HOLD.

At the same time, Renaissance Capital has issued a report on Ecobank (ETI) with a BUY rating and a TP of NGN14.2/share, implying upside potential of 38% from current levels.