Emefienim is executive director at Sterling Bank

Managing Director, Capital Bancorp Plc, Mr. Higo Aigboje in this interview with Chris Ugwu, speaks on the financial services sector and the economy and concludes that there is a possibility of rates cut in 2018. Excerpts:



What is your take on the financial market?
The Nigerian financial market performance in 2017 was more stable than the previous year using some economic and market indicators as yardsticks.
Unlike the previous year where only the money and bond markets were active as a result relatively high interest rates occasioned in part by the ever increasing inflation rate and federal government’s appetite for borrowing, the stock market had its fair share in the upbeat with the stock market index closed northward and ranked as the third best performing stock market of 2017 globally.

The Foreign Exchange market experienced some level of stability owning to CBN’s actions on introduction of Investors’ and Exporters’ Window and CBN’s direct intervention occasioned by the accretion to the foreign reserves from oil revenues.
The banking industry also saw some level of better performance as some of the banks were able to latch on the opportunities in Nigerian Treasury bills in the year. The banks also saw an improved provisioning as a result of the improved performance of some of their debtors in the year.

Do you expect the gradual recovery in the economy to gain momentum this year?
In what we describe as a fair outing for the Nigerian economy in 2017 having come from a difficult year in 2016, I think the country looks poised to record better performance in 2018. In the early part of the year, the International Monetary Fund (IMF) projected a growth rate of 0.8 per cent while the World Bank projected a growth rate of 1.00 per cent for 2017.

Recent forecast by both bodies have maintained their initial growth forecast for the country. However, we are more bullish as we maintain our growth estimate of 1.5 per cent for 2017. Growth in 2018 was projected to significantly improve on the back of firming oil prices, improved foreign exchange liquidity, rising government revenues and increase in the government spending.

Going from the third quarter 2017, GDP report released by the Nigerian Bureau of Statistics (NBS), the non-oil sector of the Nigerian economy needs to report signs of a recovery for growth to reach levels seen before the oil price decline as consistent negative growth in the non-oil sector will continue to remain a drag on the overall growth potential of the Nigerian economy.

I also hope that appropriate policies, both monetary and fiscal will be put in place in 2018 to drive economic growth. I think also that the Federal Government will rapidly pass the 2018 Budget into law and execute the projects in desirable time to boost economic activities. 1 am of opinion that if the government rides on the current events, which presently are in the favour of Nigeria, the country will grow by an average of 2.2 per cent in 2018, despite downside risk to this growth forecast.

So, what are the downside risks to Nigeria’s GDP growth?
The projected GDP growth rate for 2018 should become a reality if the government continues to boost its non-oil sector revenues and properly deal with issues relating to wasteful government spending and non-friendly business policies.
Some of the downward risks to GDP growth also include a sudden decline in oil prices due to increased production from exporting countries; a sudden rise in insecurity and insurgency, which may disrupt economic activities in Nigeria; improper management and use of its foreign reserves, which would lead to further depletion and cause FX volatility and lack of clear and proper fiscal policies to drive different sectors of the economy.

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The trending patriotic policies by advanced countries may also hamper inflow of both Foreign Direct Investments (FDIs) and Foreign Portfolio Investments (FPIs) even as some advanced countries have reported a rise in interest rates.

Looking at how some banks fared in 2017, do you think they will continue to return profits in 2018?
The Nigerian banking sector has remained one of the most vibrant and delicate sectors in the Nigerian economy especially as it has the capacity to send shock waves round the economy if it fails.
The sector has since 2015 continued to suffer significant headwinds as the CBN monetary policies and economic realities have continued to hamper its ability to significantly grow profits. However, most of the Tier-1 banks have been able to surmount these headwinds and have continued to surpass expectations even in the face of the unfriendly business environment and hostile business policies.

2017 saw the banking sector continue to post bumper earnings especially for most of the Tier-1 banks and a few Tier-2 banks. The rest of the group have continued to battle with high level of loan impairment, which has eaten deep into their operating profit and dampened their ability to grow their bottom line.

Non-Performing loans as at June 2016 stood at 11.7 percent and rose to 12.8 as at December 2016 with a large portion of the rise attributed to the banks in the Tier-2 space. The CBN may need to increase its oversight of the credit and approval process of the tie-2 banks in a bid to limit the rising NPLs.

The banks in 2017 are also expected to report higher interest income on the back of the high interest rate environment observed during the period while we expect an increase in cost to income ratio for the period.
Going forward, the banking sector is expected to remain robust and continue to return profits into 2018 but with the implementation of IFRS 9, which require banks to recognise impairment sooner and estimate lifetime expected losses against a wider spectrum of assets, which is expected take effect from 2018, we expect a prompt increase in the banks impairment charge, which will reduce profitability going forward but make banks stronger and less exposed to risk of impairment shocks.

Also, despite the reduction in interest rates, which is expected to increase banks’ lending to the real sector of the economy, the implementation of IFRS 9 may hamper some of the banks as an aggressive rise in loan advances would give rise to increased provisioning, which may affect the bank’s capital buffers in the immediate. All in all, the banks are expected to have a decent outing during the year 2018 with less shocks expected in the sector.

Do you think there is need for rates cut following the decline in inflation?
Having maintained the Monetary Policy Rate (MPR) and Cash Reserve Requirement (CRR) at 14 per cent and 22.50 per cent respectively while also retaining the asymmetric corridor of +200 bps above and -500 bps around the MPR for over a year, we expect a rate cut at the first meeting of the Monetary Policy Committee of the CBN in 2018, and we are of the opinion that the committee will cut the benchmark interest rate by 0.5 per cent or 1.00 per cent thereby taking the Monetary Policy Rate (MPR) to 13.50 per cent or 13.00 per cent.

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The projected cut in rate is imminent owing to CBN’s continuous slash in stop rates for treasury bills, which once stood at a high of about 18.815 per cent in May 2017 and closed the last auction date at 15.57 percent last November.
The continuous decline in inflation figures have also supported the banks target to reduce the interest burden on its debt obligation and also offer real return on its securities.

In a bid to reduce the country’s domestic debt obligation, CBN repaid all the maturing treasury bills that matured in December 2017 and have signalled that it would continue to drop its stop rate going forward into year 2018 even as the CBN targets inflation rate below 12 percent for 2018.

As CBN drops MPR rate, we expect the real sector of the economy to benefit as a few banks will be forced to lend to the real sector of the economy as government securities become less attractive given the low return being offered.
Businesses will also see their interest expense drop on the back of dropping interest rates and we anticipated the MPR to close the year at 12 per cent, 2 per cent down from 14 per cent benchmark rate as at December 2017.

What is your take on the stock market in 2017 and the prospects in the current year?
The Nigerian stock market had an impressive showing in 2017 having closed the year with return of 42.30 per cent making it the third best performing stock market behind Argentina, which returned 77 per cent and Turkey that returned 48 per cent, we have projected a 25 per cent return for the Nigeria Stock Market for 2018 though downside risk to achieving this target remain visible.

The market gains in 2017 were driven by impressive returns in the Banking sector, which returned 73.32 per cent, the consumer goods sector that returned 36.97 per cent and the industrial goods sector, which returned 23.84 per cent while other sectors of the market recorded gains except for the Alternative securities market (ASEM), which closed down by 8.60 per cent.

The trading aspect recorded significant recovery while the market witnessed increased issues compared to 2016 where there were no issues.
The year 2018 is expected to witness a similar trend observed in 2017 as economic indicators have improved and the world now projects increased investor confidence and GDP growth for Nigerian economy.

Going forward we expect to see more trading activities in the secondary market as listed companies will begin to trade at new highs never seen before even as their profitability soars on the back of a vibrant economy.
The primary market is also expected to be active in the year with expectation of new listings, mergers and acquisitions, Rights issue, listing by introduction etc. are all expected to drive overall market activity and deepen the market in the process.

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What do you think will determine the success of the market this year?
The success of the Nigerian stock market will be hinged on many factors. Amongst them are the firming or stability of oil prices; constant monitoring and effective management of the foreign exchange market; improvement in corporate earnings for the period; significant focus on the non-oil sector to increase output; enhancing the country’s non-oil sector export proceeds to improve FX liquidity; a lower interest rate regime; effective implementation and communication of the government economic policies.

Others include government focus on the real sectors of the economy to stimulate the economy; improve market participation by local investors and Domestic institutional investors; continuous robust regulatory oversight of the listed companies by all the market regulators; passage of Petroleum Industry Bill, unbundling of Nigerian National Petroleum Corporation (NNPC) and listing of the resultant companies; listing of already privatised companies such as MTN, Gencos and Discos and effective use of monetary policies.

Having seen the nine months earnings result for most of the listed companies, investor will begin to take position in anticipation of the companies audited result, dividend declaration and Q1 2018 result, which we expect to boost stock prices in the immediate and also trigger further activities especially for companies, which report impressive performance for their Q1 2018 numbers.

Generally, despite the downside risk to the outlook of the equities market, we are optimistic about the performance of the equities market as we believe that most of the fundamentals are in favour of a further surge in the equities market.

In conclusion, despite the rally observed in the equity space in 2017, there remains a pool of untapped potential in the stock market as most of the listed companies still trade at prices below their book value while a few stocks still trade at prices below our recommended target price.

We believe the current prices still gives room for ample upside and significant return to investors despite the fact that the dividend yield of the company would have slightly inched lower on the back of rising prices but still remain attractive especially with the potential benefit of capital appreciation in the short to medium term. We however, advise that investment in the stock market be made mainly on fundamental analysis and not on the back of a band wagon effect, which could fizzle out at any moment and keep the investor trapped in a wrong stock.