Banks’ failure to link economy exposed by discount to South African peers

Nigerian banks have a $503 billion economy to exploit but their valuations are puny compared to South African lenders, showing low linkages with the real economy.

The top five lenders (FBN Holdings, Zenith Bank, Guaranty Trust Bank, UBA, and Access Bank) have a combined market capitalisation of $16.4 billion (N2.664 trillion), which is dwarfed by South Africa’s FirstRand Ltd, South Africa’s largest bank, with a market cap of $23.1 billion (R243.27 billion).

Banks operating in South Africa’s $350 billion economy had total assets of $352.3 billion (R3.7 trillion) in 2013, compared with Nigerian banks’ assets of $139.5 billion (N22.64 trillion).

South African lenders’ assets would equal 100 percent of GDP, compared to 28.2 percent for Nigerian lenders.

“Nigerian banks have not been so effective in leveraging on the country’s growing economy, because of the 2008 financial crisis and the 2009 bad debt era that hit the banks, coupled with the cheap funds they get from the public sector,” said Kayode Omosebi, analyst at UBA Capital plc, a Lagos-based investment bank.

“Loan-to-deposit ratio of Nigerian banks at c.58 percent on average, compared to their SA peers at c.90 percent on average, further shows how conservative the banks are,” Omosebi said.

Investors are valuing South African lenders at a premium to their Nigerian peers as they trade at an average of 2.1 times book value, compared to 1.44 times for Nigeria’s top five banks.

The Nigerian Stock Exchange (NSE) Banking 10 Index has lost -2.23 percent this year (July 22) compared with a 14.9 percent increase for South Africa’s seven-member FTSE/JSE Africa Banks Index.

Domestic bank credit of N16.9 trillion (June 2014) extended to the private sector in Nigeria is equivalent to 21 percent of GDP, compared with about 70 percent for South Africa.

Highlighting lenders’ low linkages with the real economy and 170 million plus population, Nigeria’s financial services sector contributed just 3 percent to rebased GDP, compared with 15 percent for South Africa.

Analysts say that may be an opportunity for investors to ride a secular wave of growth over the coming years, as Nigerians demand banking services as their incomes grow.

“We think Nigeria’s low banking penetration and the likelihood of lower rates from 2H15 imply significant growth potential for banks,” said Yvonne Mhango, analyst at Renaissance Capital, in an economics research update released July 14.

Nigeria and South Africa are the number one and two economies in Africa, respectively, and together they make up nearly 40 percent of the continent’s GDP.

The cumulative 2013 FY net income of Nigeria’s five tier-one banks fell -5.41 percent to $2.08 billion (N338.8 billion), according to data from their earnings reports.

South Africa’s top four (First Rand, Standard Bank, Ned Bank, and Barclays Africa Group) reported headline earnings growth of 16.7 percent to $5 billion (R52.68) in the same period.

Tier-one Nigerian banks had average return on equity (ROE) of 20.2 percent, compared to 16.9 percent for South African lenders.

After dodging a bullet in the form of a 2008/9 banking crisis, reforms of Nigeria’s financial services sector initiated by its central bank have led to significant balance sheet clean-up, cost of risk for banks falling, better underwriting standards, and sustained net interest margins. However, the banks are still not as big or as impacting on the real economy are their South African peers.

The CBN estimates that 46.3 percent of Nigeria’s total adult population was excluded from financial services at the end of 2012. This figure compares with 32 percent in South Africa.

Nigeria’s 21 Deposit Money Banks (DMBs) had only 9,676 ATMs as at August 2012, compared to 24,000 ATMs in South Africa.

Investors should buy Nigerian lenders as the financing of oil, gas, agriculture and power projects will help power GDP growth to 7.2 percent for 2014, compared to IMF forecasts of 2.7 percent growth for South Africa, said Omosebi.

“Nigerian banks continue to remain among the most attractive in EMs from a top-down perspective. We expect strong EPS growth in the banking space over the medium to long term,” he said.

PATRICK ATUANYA