Banks low valuations may signal new normal

Nigerian Banks, a majority of which are currently trading at a discount to book value may see such low valuations persist for a while, as analysts predict a new normal of stagnant earnings growth.

“Near term, the earnings outlook is challenging – higher rates are good for pricing, but tight liquidity, fee income regulations and fewer immediate growth opportunities anchor ROEs at 17 – 19% for Zenith Bank and 23 – 25% for Guaranty Trust Bank (GTB) over the next three years,” said Morgan Stanley analysts, Samuel Goodacre and Andrea Masia in a September 25 note to investors.

“This level of returns profile is more than priced into Nigerian bank stocks, we feel, which appear expensive, compared with the EEMEA bank peer group,” the analysts said.

Four out of the five Nigerian top tier lenders are trading below tangible book value per share.

FBNH trades at 0.37 x, Access Bank 0.40 x, UBA 0.48x and Zenith Bank 0.95x.

Only GTB trades above book value per share at around 1.84 xs, according to BusinessDay’s calculations from FT data.

Analysts say macro vulnerabilities that could affect banks remain high, such as low oil prices, growing FX market pressure and the uncertain macro policy.

This may make the banks Cost of Equity (COE) to remain anchored at elevated levels.

A firm’s COE represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.

Nigerian lenders returns which peaked in 2012 have since receded amid a wave of regulatory constraints.

Analysts say any significant near-term improvement in sector returns is likely to be driven by a loosening of monetary policy or interest rate cut, which will not happen anytime soon, as the Central Bank’s major focus is shoring up the currency, as oil prices collapse.

“High securities yields imply to us that credit growth remains weak near term. In this environment, liquidity and capital strength are vital, as they determine the buffer levels of any bank to shield itself from systemic shocks that arise from the multiple regulatory changes,” said Renaissance Capital bank analysts led by Adesoji Solanke, in a September 16 note.

“Innovation will be a critical success factor in driving growth going forward.”

The top five banks account for more than half the loans in Nigeria’s banking system.

The Nigerian Stock Exchange Banking 10 Index has lost negative 9.1 percent this year (September 30) compared with flat returns for South Africa’s seven – member FTSE/JSE Africa Banks Index.

Investors and the banks themselves are faced with a challenging macro situation in Nigeria with GDP growth through the first half of 2015 slowing down meaningfully.

Growth fell to 2.35 percent in the second quarter (Q2) of 2015 from 3.96 percent in the first quarter (Q1) of 2015.

Key financial metrics reported by Nigerian banks are likely to continue to weaken in the closing months of 2015, according to Fitch Ratings Services in a September 25 report.

“Our expectations for loan growth are muted – a nominal 5% increase in 2015, which is low by Nigerian standards – due to the much deteriorated operating environment,” Fitch said in the report.

“Viability Ratings assigned to Nigeria’s banks, all in the ‘b’ category, already reflect a wide range of weaknesses, including the increasingly strained FC liquidity position. Our sector outlook for Nigerian banks remains negative.”

PATRICK ATUANYA