Sustained growth in revenues and profits, as well as recovery and return to profitability, can be expected to be the highlights of the second-quarter corporate earnings stories, likely to be coming to the market in days.
With the improvement in economic activities during the quarter, rapid earnings growth can also be expected on a year-on-year basis from the numbers of the first quarter.
These developments will expectedly reinforce the running bull in the stock market, as investment capital – domestic and foreign surges into equities in search of high returns.
The increased economic momentum, the driver for corporate earnings, is rooted in improving growth in the real economy, picking up from the slowdown in the fourth quarter of 2024, reflecting the most industry-wide real GDP growth for the second consecutive year in many years.
The main springboard will be the oil sector, which came to a turning point last year from years of sustained decline to sustained positive growth across quarters. A consistent positive growth for the second year is quickening economic activities directly and indirectly across industries.
The stimulatory impact of the oil sector recovery on consumer spending offers a healing balm to companies and households hurt by the inflationary effects of naira devaluation and a hike in the prices of petroleum products. With inflation easing, wage increases, and other adjustments by households, the economy is rebounding to a new equilibrium, and consumers are progressively returning to the markets.
Another major upswing with a significantly positive impact on the economy has happened in the banking industry. The recovery of the oil and gas sector, where the bulk of bank loans and advances are stashed, has powered revenues and reduced credit loss expenses for banks generally.
Towering growth in interest earnings of banks seen since last year is expected to be maintained in the second quarter. Complemented by the prevailing high interest rates, interest income can be expected to drive bank revenue growth for the second year in 2025.
With liquid balance sheets against high-income yielding short-term assets, accelerated growth in bank revenues will be a general trend in the banking industry in the second quarter.
The ability of banks to turn improved revenues into profit can be expected to strengthen in the second quarter. Cost savings from loan loss expenses will lead the way for cost savings for banks, and with slowdowns in operating costs, elevated profit margins will power bank profits in the second quarter.
Major recapitalisation programmes of banks aren’t leading to drops in per-share data and rates of return due to high-speed growth in revenues and profits. This is happening for the first time in banks’ operating history, and the share price rally of banking stocks isn’t out of place.
Industrial enterprises are tapping into the progressive recovery of consumer spending capacity to grow sales volume and revenue, and they are expected to show further progress in this direction in the second quarter.
Like the oil sector, the industrial sector turned around from many years of uninterrupted decline in 2024 and a continuing positive growth for the second year is expected to spur corporate earnings for the second year as well.
The high point for the industries is rising sales against moderating cost, a benign combination that has elevated profit capacity generally. Relative exchange rate stability has permitted rebalancing of costs and incomes by industries, as the tide turns from costs growing ahead of sales revenues to sales advancing beyond costs.
A slowdown in production costs and sharp drops in exchange loss-driven expenses will most likely inject new life into the bottom lines of industries in the second quarter.
An exception to the rule will be companies experiencing a reverse flow of net foreign exchange gains of the preceding two years. Companies having loss remittances from offshore subsidiaries and other exposures may miss the recovery/growth boat in the second quarter.
Watch out also for those powered by windfall other incomes in the previous year’s coming down to normal levels, as exchange gains thin out this year.
Expect further progress from companies that are returning to profitability from foreign exchange-induced losses of the last two years. A sudden drop in net exchange losses or even a reversal to net gains constitutes the bullish point for these operators. Growing revenue against a sharp drop in cost gives them a much higher upswing than profitable companies.
While corporate turnarounds present a justification for a bullish run, equity traders may be over excited about companies with lost retained earnings and shareholders’ funds. At full year, all profits earned will have to be transferred to rebuild reserves and patch up equity holes that might take many years to fill up.
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