Nigerian Banks: Weathering the market storm

Global:  Investors reacted positively to the latest U.S. inflation data, where prices rose 6.5% y/y (Previous: 7.1% y/y). Optimism across markets was driven by speculation that inflation has peaked across key economies, and market participants should expect to see a continued slowdown in inflation.

In Asia, investor sentiment was further boosted by the latest trade data from China. The nation’s trade surplus increased to $78 billion, surpassing market expectations of $76.2 billion. Meanwhile, the Shanghai Composite rose 1.19% w/w, while the Nikkei rose 0.59%.

In Europe, investors reacted to the latest batch of economic data. Industrial production in Germany rose 0.4% y/y, while investor confidence in the Eurozone improved m/m. However, statements from ECB officials noted that the growth outlook remains weak, while interest rates would have to rise significantly to ease inflationary pressures. For the week, the German DAX, French CAC, and London FTSE-100 rose 3.45%, 2.35%, and 1.56% respectively.

Finally, in the U.S., investors largely took positions in the equity market ahead of the U.S. inflation data release, as earnings season comes into focus. Following the release of the data and statements from U.S. Fed officials, optimism grew over speculations of a smaller 25bps rate hike from the U.S Fed in February. The NASDAQ, DJIA, and S&P500 were up 3.80%, 1.69% and 2.30% w/w respectively as at time of writing.

Domestic Economy:    According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), crude oil production (excluding condensates) reached a 9-month high of 1.23 million bpd in December 2022. This represents a 4.2% m/m increase over November 2022 output, but it still falls short of OPEC’s 1.8 million bpd allocation. The increase in output in December was primarily due to an increase in oil production across the key terminals. Because of Tompolo’s warfare on oil theft, oil output has been steadily increasing over the last three months. Although Nigeria missed out on big gains when oil prices were above $100 per barrel, continued output growth could boost crude export earnings (the country’s main source of foreign exchange), and relieve pressure on the Naira.

Equities:   Nigerian equities rebounded this week, as broad-based interest across the NGX propelled the market higher. The benchmark NGX rose 2.52%, with all major sector indices closing in the green w/w. With earnings seasons approaching, we saw investors continue to take positions across the market, notably in the Banking Space. The sector ended the week as the best performer, rising 3.48% w/w, with the likes of ZENITHBANK, ACCESSCORP, and UBA rising 4.50%, 3.33%, and 4.38% w/w respectively.

Likewise, in the Industrial Goods space, optimism in the cement makers drove the sector higher, with WAPCO, BUA CEMENT, and DANCEM rising, 5.42%, 3.59%, and 3.05% w/w respectively, contributing to a 3.34% w/w gain for the sector.

Moving to the Consumer Goods space, DANGSUGAR was the primary driver of gains recorded by the sector, as it rose 7.50% w/w, and the sector gained 0.68% w/w. Finally, investors remained bullish on players in the oil marketing space, with ARDOVA and TOTAL rising 6.11% and 10.00% w/w respectively; with the Oil and Gas sector rising 3.19% w/w.

Fixed Income:   This week’s secondary market was dominated by bearish sentiments. Starting with the bond market, sell-side sentiment across the benchmark curve drove the average yield up 19 basis points w/w. Similarly, NTB selloffs increased the average yield by 16bps w/w. Finally, given muted activities in the OMO space, yields remained unchanged w/w

Currency: The Naira depreciated ₦0.20 w/w at the I&E FX Window to ₦461.90.

On the other hand, the CBN’s policy on the local currency could cause a spike in deposits, although this would likely be temporary. However, there is a high chance that the cash deposited ahead of the new notes being reissued could linger in the banking system, depending on the availability and ease of access to the new notes. Thus, we expect Q4’22 and Q1’23 deposits to spike, before levelling off in the outer periods of 2023.