Q3 earnings season to mirror Q2

The Q3 2016 earnings season kicked off with UBA last week. The bank reported results that were generally encouraging, especially given the challenging macroeconomic backdrop. Pretax profits grew 16% y/y to N21bn and puts the bank on track to meeting market expectations of a full year pretax profit of at least N75bn, equivalent to a y/y growth of c.10%. We expect other tier 1 banks to follow UBA ‎over the coming weeks. Their results are likely to show similar trends and in some cases better-than-expected results on the back of fx-related gains. In contrast, we expect most non-financial companies’ results to feature losses stemming from naira devaluation, similar to what we observed in Q2.
The effect of the slump in oil prices continues to be felt in the weak GDP figures for Nigeria and by extension, pressure on the naira.
Q2 results showed that banks were able to capitalise on the naira’s weakness by being net long dollars (within regulatory limits), and book significant fx-related gains as a result. For our universe of banks, on average, fx-related gains accounted for at least 40% of their H1 2016 pretax profits.
In Q2, the naira depreciated by c.30. ‎In Q3, it fell further by 11%. All else being equal, it follows that banks are likely to report additional fx-related gains. On its Q2 2016 result conference call, GT Bank indicated that as at then (end-Aug), the additional fx gains the bank was sitting on was N40bn. For the tier 1 banks in particular, even if they have to book additional provisions due to loans going bad, the fx gains are likely to dwarf the impact of the former.

The one bright spot outside of the banks is the palm oil sector. Importation (competitors) of crude palm oil has become more expensive, thanks in part to a CBN policy which pushed demand for fx by this group out of the interbank into the parallel market. Both domestic producers Presco and Okomu Oil reported triple digit y/y growth rates in pretax profits in Q2.
Ultimately, focus will shift to the underlying results when the naira stabilises. In the meantime, smart money has to follow those names which are able to capitalise on the dislocations the naira depreciation is creating.

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