Monthly Highlights: May 2010

•  Increased profit taking in Nigeria, Kenya and Mauritius
•  Ghana was the only nation to exhibit positive performance on the month
•  Broad-based weakness across Southern Africa
 

Increased profit taking in Nigeria, Kenya and Mauritius

West African equity markets were mixed as the NSE ASI (Nigeria) and BRVM Composite (Francophone) fell by -1.39% and -6.46% respectively whilst the GSE ASI (Ghana) rose by +8.96% on the month. In Nigeria, investors were forced to digest a number of corporate earnings announcements with banking results taking centre stage. We saw mixed performance across the banking sector with FCMB, Diamond Bank and Access Bank disappointing while First Bank, Skye Bank and ETI delivered encouraging results. First Bank appears to be gaining market share and growing its risk assets at a faster pace when compared to peers. Skye Bank displayed stronger than expected margins on rising recoveries whilst ETI appears to be reducing its loan loss provisions amid improving margins and an expanding deposit base. By contrast, FCMB suffered from declining revenues and a reduced risk appetite whilst higher operating expenses weighed heavily on after-tax profit. Diamond Bank managed to deliver stronger than expected revenues although declining loans weighed on interest income and we could still see increased provisioning in the months ahead. Despite considerable recoveries at Access Bank, the company’s earnings were weighed down by significantly higher operating expenses. On the whole, we are of the view that the NPL crisis has settled down as evidenced by this month’s MPC decision to leave rates on hold while retaining the asymmetric corridor at 200bps above for lending and 500bps below for deposits. In effect, it would be difficult for the Central Bank of Nigeria to loosen further with interbank rates at 1.1% and inflation at 11.8% y/y. Despite the headwinds faced by the Nigerian banking sector, we remain encouraged by consumer sector performance as Nestle Nigeria and UACN delivered favourable results on the quarter. Nestle’s results were particularly encouraging as the company’s strong earnings and cash flow will be used to secure favourable financing terms from its parent as the company seeks to increase its capacity. In other action, the brewers were pinched by Nigeria’s ongoing credit squeeze as key distributors could not secure the necessary financing to sufficiently conduct their operations. This resulted in higher costs and tighter margins at both Nigerian Breweries and Guinness Nigeria.

Ghana was the only nation to exhibit positive performance on the month

East African equity markets retreated in May with the NSE 20 (Kenya) and SEM-7 (Mauritius) declining by -3.26% and -12.76% respectively. In Kenya, markets retraced as investors attempt to assess the economic impact of cancelled European flights on Kenya’s horticultural exports. Although the impact from Icelandic volcanic eruptions will indeed be meaningful, we remain encouraged by strong corporate earnings growth, improved tourist arrivals, rising remittances and increasingly accommodative monetary policy. In Mauritius, bank earnings from MCB and SBM declined as cost-to-income ratios rose on back of rising non-interest expense. Nevertheless, the quality of Mauritian loan books continues to improve as evidenced by the reduction in impairment allowances. In other action, the Bank of Mauritius left the repo rate unchanged at 5.75% despite rising oil prices, hawkish CPI dynamics and expectations of rising output over the latter half of the year. In other action, the DSEI (Tanzania) and USE ASI (Uganda) fell by -3.58% and -1.00% respectively on the month.

Broad-based weakness across Southern Africa

In Southern Africa, performance came in weaker across the board with the LuSE ASI (Zambia), Gabarone DCI (Botswana) and MSE DCI (Malawi) off by -7.60%, -7.54% and -0.63% respectively. In Zimbabwe, equity trading volumes remain subdued through the first half of the year as concerns surrounding indigenisation weigh heavily on investor sentiment. We contend that the emergence of Zimbabwe’s money market has also contributed to the lack of interest in Zimbabwean equities, and estimate that roughly 50% of the USD 1.4 billion in local deposits is comprised of “hot money” seeking to take advantage of attractive yields. As a frame of reference, short-term yields in Zimbabwe average approximately 25% although they surged as high as 40% at the height of the recent credit crisis.