Weak economy: Manufacturing and banks’ challenges
By now, it is a common knowledge that the nation’s economy is seriously under challenge. But the challenges are more of what happens to the various economic segments that make up the whole.
In the first half of the year, the macroeconomic terrain remained difficult as the indicators persistently performed poorly. The first quarter (Q1) Gross Domestic Product (GDP) contracted -0.4 per cent- a 13-year low, as challenges in the economy, broadly tied to lower oil prices and foreign exchange crisis, as well as delayed fiscal stimulus depressed economic activities in the period.
Already, projections have remained bearish against the second quarter (Q2) GDP, an indication that recession is now staring us in the face.
Corporate earnings being churned out in recent weeks have shown weaknesses and negative across companies in the banking and manufacturing sectors. However, the downstream oil and gas companies, which partly created the burst cycle in the banking industry, defied the economic cycle. This was attributed to policy reforms made in May 2016 which partially deregulated the sector.
Consequently, investor sentiment on the capital market has presently waned, reversing gains recorded in June, which followed foreign exchange policy implementation that drove indices to a positive year-to-date returns.
In the banking sector, the tougher operating environment is reflected in industry levels of profitability and asset quality.
“We observed spikes in Non-Performing Loans (NPLs) and impairment charges which weighed on profitability of banks, albeit with an outsized impact in the Tier-2 segment.
“From the list of banks that have released half-year results, FCMB (+259.9%), UBN (+195.3%) and ETI (+84.8%) recorded the largest spikes in impairment charges.
“Also in relation to profit after tax, Unity Bank (-70.2%), Sterling Bank (-25.9%) and Diamond Bank (-25.5%) recorded the largest year-on-year declines,” analysts at Afrinvest Securities said.
They noted that for few banks, including FBN Holdings, the non-interest income was up 52 per cent year-on-year, as profitability was buffered by it, but partially offset higher impairment provisions.
Despite the fact that most of the results so far have beaten broader analysts’ conservative estimates, still short term outlook on assets quality, capital adequacy and core earnings remain doubtful.
This is because they subject to exposure of the banks to the oil and gas sector loans, currently still pressured by lower oil prices and disruption of production in the Niger Delta, as well as significant depreciation of the naira.
“The banking index has outperformed the market and remains the only index with a positive year-to-date returns (+6.4%). We expect the sector to continue to outperform, driven by defensive Tier-1 (most especially Guaranty Trust Bank, Access Bank and UBA) counters which we are long on,” they noted.
However, for the Consumer Goods segment of the market, there are also indications of the tougher operating environment stifling consumer spending and increasing operating and finance costs.
Two of the largest players in the sector, Nigerian Breweries and Nestle, according to the securities company, posted rather unimpressive half-year results in which revenue grew for both companies, while profit after tax declined, a trend noticed almost across the sector.
While the Nigerian Breweries recorded a 3.8% year-on-year growth in revenue, Nestle improved 22 per cent year-on-year, but both suffered 11.2 per cent and 94 per cent year-on-year plunge in profit after tax respectively.
“We observed the massive jump in finance cost across the sector, broadly tied to weaker exchange rate within the period which has weighed heavily on servicing obligations on foreign currency liabilities.
“Specifically, Nestle recorded a 361.5 per cent surge in finance cost owing to the large volume of foreign currency loans, likewise the Nigerian Breweries 151.5 per cent.
“Cement companies have seen operating margins drop against the backdrop of an industry-specific pricing pressure and higher operating cost attributable to gas supply shortages.
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