Johnson Chukwu is the Managing Director/CEO of Cowry Asset Management Limited, an Investment Banking firm with headquarter in Lagos. In this interview with Financial Vanguard, he spoke on some of the issues that will shape activity in the banking sector in 2017. Excerpt:
By Nkiruka Nnorom
THE banking stocks started the year bearish with majority of them recording negative returns in the first three days of the year. What do you think is responsible for low appetite for their stocks? Transaction has not started in full gear and market activity in just two days will not be a barometer to determine what will happen. Be that as it may, banking stocks are not likely going to be the first choice of short term investors given the last year’s economic environment where the banks suffered a lot of regulatory headwind.
We saw interest rate of 18.4 percent, 18.5 percent on treasury bill of 364 days, which chocked up a lot of liquidity from the banking system. So, you find out that only few banks reported quarterly year-on-year, Y/Y, growth in performance. Given that situation, short term investors are not going to be very aggressive with banking stocks.
So, I want to believe that the first quarter of this year may not be rosy for banking stocks. Investors will rather sit on the fence and wait for the banks to start publishing their results to know what direction to go.
So, how long do you think this lull will continue in the sector?
It will last to the end of the first quarter this year. After which, the results will begin to come out and as the results trickle out, investors will make better judgement on which direction to go. Last year, many of the banks delivered not-too-good financial performance in their interim results. Moreover majority of them had high rate of non-performing loans which negatively affected their result. Do you think this will continue this year?
Unless there is a clean up of of non-performing loans …, I hear that the Nigerian Deposit Insurance Corporation, NDIC, is contemplating to set up a second AMCON to take over the non-performing loans of banks.
Unless there is a clean up by an extra-ordinary agency of government, it won’t be easy for those loans that have gone bad to recover so quickly. But a lot also depends on the general economic condition of the country. If the economy reverses from a repression to a rebound, then over time, some of the NPLs will be worked out and they will become performing again, but this stage will take some time.
So, I think the incidence of non-performing loans in the banks will be hot throughout this year. Not that new ones will come up and I don’t think the banks will be aggressive in creating loans, so it will still be the existing loans that will remain in the balance sheet of the banks and will continue to weigh down on their performance.
So, we still expect their bottom-line to be in the negative at the end of this financial year?
Not necessarily negative. Some will be able to reverse to positive, but in terms of banking returns, there will be less this year.
What should be the expectation of shareholders in terms of dividend payment?
Shareholders expectation of dividend should be relatively subdued this year. People should expect not- very-aggressive dividend payment this year except some a very few banks. At the industry level, dividend payout for 2016 financial year, which is going to 2017 should be lower than the preceding year (2015). But then, you could still have some out shooters, that is a few banks that will pay better than they did last year. But it will be just a few of them.
Generally, what will define the outlook in the banking sector this year?
It will be on what happened in the federal government’s bonds’ market, both at the short end of the market to the long end of the market. What I mean by that is the yield that prevails at the government’s end of market will determine the availability of liquidity in the banks and their ability to create loans this year and will also influence the recovery of the economy as regards to the private sector.
So, a lot will depends on what the Central Bank do with interest rate in the short end of the market and long end of the market. That will be one critical factor that will determine the performance of the banks.