Nigeria’s Biggest Bank Outshines Kenyan Peer

Pitting Nigeria and Kenya’s biggest banks by market value against each other shows just how much state intervention hurt Nairobi-based Equity Group Holdings Ltd., while Guaranty Trust Bank Plc in Lagos fended off a contracting economy by benefiting from a weaker local currency.

Equity Group reported its first-ever drop in annual profit last week as non-performing loans more than doubled and lending in the final quarter shrank in the wake of interest-rate caps announced in August in East Africa’s biggest economy. By contrast, GTB’s net income climbed 33 percent as earnings from lending increased and the naira’s decline against the dollar boosted non-interest revenue.

“GTB stands out in the Nigerian banking sector based on their ability to optimize their balance sheet and conservatively position themselves against any unforeseen shocks,” said Craig Metherell, an analyst at Avior Capital Markets Ltd. in Cape Town who has a buy recommendation on the stock. He maintained his hold rating on Equity’s shares, saying they are trading close to fair value and that a re-rating may only happen should Kenya relax the rate-cap rules, which is only likely after elections scheduled for August.

Kenyan President Uhuru Kenyatta said last week he’ll rectify the decline in bank lending caused by his decision to limit lending rates, without saying when or what measures will be taken. While investors still remain negative toward Nigeria because of a lack of foreign exchange that is curbing growth in the West African country, lenders are reorganizing bad debts, absorbing currency fluctuations and diversifying away from loans to the oil and gas industry following a more than halving in crude prices since mid-2014.

‘Problems Identified’

“Nigerian banks appear to be navigating current challenges better than anticipated,” said Aleksej Gren, a fixed-income analyst at Exotix Partners LLP in London, who has a buy recommendation on GTB’s bonds due November 2018 as well as 2019 notes issued by Zenith Bank Plc and 2021 debt securities from Access Bank Plc. “Banks are prepared for naira weakness. Further asset quality deterioration is likely, but many of the problems have already been identified.”
Kenya’s 11 publicly traded lenders have declined an average of 12 percent since Aug. 24, when the rate caps were announced, with Equity Group sliding 17 percent. That compares with a 2.5 percent drop over the same period for an index of Nigeria’s 10 largest and most liquid banking stocks, with Guaranty adding 1.5 percent.

While policy issues remain a major hindrance to Nigeria’s economic health, GTB offers a hedge against naira devaluation and profit before tax could rise 53 percent in 2017, said Avior’s Metherell. Pretax profit at Equity Group is expected to increase 3.5 percent this year, held back by the interest-rate caps and risks that the Kenyan shilling may weaken more than 6 percent against the dollar, he said.



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