Monthly Highlights: July 2012

•  West African equities rose as Nigeria outperformed amid strong 1H12 results and record profitability across the banking sector
•  East Africa exhibited strong performance as Kenyan equities remain in favour
•  North African equities rose as Egypt continues to perform well
•  Southern Africa performed well on back of strength in Zambia
 

West African equities rose as Nigeria outperformed amid strong 1H12 results and record profitability across the banking sector

West African equities rose as Nigeria outperformed amid strong 1H12 results and record profitability across the banking sector. Broadly speaking, well-funded Tier I banks (e.g. FBN, Zenith, UBA) benefited from the highly favourable interest rate environment as net interest margins (NIMs) rose in line with rising short-dated yields. On a year-on-year basis, Nigerian 30-day and 90-day T-bill rates are nearly 590bp and 640bp higher despite only modest inflationary pressures. Looking ahead, we see the potential for NIMs to decline amid rising competition for low cost funding as Tier I banks with more efficient cost structures and healthy growth in non-interest income appear positioned to outperform. In terms of asset quality, bank balance sheets continue to improve although the rise in private sector credit extension may lead to future impairments and greater provisioning going forward. In effect, this month’s decision to tighten the Cash Reserve Ratio by 400bp is indicative of such concerns as it constrains a number of Tier II banks (e.g. Fidelity) from deploying capital over the second half of the year. We also digested 1H12 results from a number of consumer names, including Nigerian Breweries, Nestle Nigeria and Unilever Nigeria. Nigerian Breweries performed reasonably well (Revenue: +23.7% y/y; PAT: +2.2% y/y) given a challenging environment marked by rising input costs and deteriorating disposable income for most consumers. Despite inflationary pressures resulting from the removal of fuel subsidies and higher import tariffs on rice and wheat, we were encouraged by the brewer’s ability to achieve continued volume growth. Despite outstanding volume growth at Nestle Nigeria (Revenue: +27.0% y/y; PAT: +51.6% y/y), we were disappointed by the company’s results as rising production, marketing and distribution costs drove profit margins to historical lows. By contrast, Unilever Nigeria displayed margin improvement through increased cost efficiency although this has not yet had a material impact on results (Revenue: +1.2% y/y; PAT: +4.7% y/y). We were particularly impressed by management’s effectiveness in reducing costs given the corresponding rise in input prices over the reporting period. Shifting to the Francophone region, we digested relatively uninspiring 1H12 results from Sonatel (Revenue: +3.6% y/y; NI: +15.5% y/y) as the operator suffered from rising taxes in Senegal, lower interconnection rates in Mali, and increased competition across the region. Looking ahead, we believe that Sonatel is poised to benefit from cancelation of the Senegalese tax on incoming calls in addition to improved network coverage and development across the region. In Ghana, we witnessed a very smooth transition of power following the unexpected death of President John Atta Mills.

East Africa exhibited strong performance as Kenyan equities remain in favour

East Africa exhibited strong performance as Kenyan equities remain in favour amid increased currency stability and an improved macroeconomic backdrop. Nevertheless, we remain cautious as this month’s 150bp rate reduction serves as a precursor to lower bond yields and declining foreign demand for KES. On the earnings front, we digested relatively lackluster 2Q12 results from Equity Bank (OI: +28.9% y/y; PAT: +14.8% y/y) as NIMs declined by 250bp on back of higher funding costs. By contrast, KCB (OI: +27.1% y/y; PAT: +60.2% y/y) continues to show steady improvement as NIMs rose by 200bp given the bank’s more diversified deposit mix.

North African equities rose as Egypt continues to perform well

North African equities rose as Egypt continues to perform well. Although we continue to favour Egyptian valuations, we have prudently tempered our short-term expectations amid recent share price gains and the increased likelihood of near-term EGP depreciation amid declining FX reserves, a growing current account deficit and elevated political uncertainty. Nevertheless, the level of international political goodwill towards Egypt has been unexpectedly optimistic, and we will continue to monitor progress toward the drafting of a constitution which clearly defines the roles of President, PM and Parliament.

Southern Africa performed well on back of strength in Zambia

Southern Africa performed well on back of strength in Zambia with currency-related appreciation fueling this month’s return. Structurally speaking, the Kwacha continues to benefit from regulatory efforts designed to improve capital requirements across the banking sector although this month’s +3.59% increase was predominantly the result of newly introduced legislation requiring invoices to be denominated in ZMK (as opposed to USD).