Top tier Nigerian banks have been rated bullish in the recent Citi Bank financial forecast released last week. Banks such as Access and UBA, according to Kato Mukuru, Director of Citi Investment Research, for CEEMEA are currently undervalued and may have a 20 percent upside for their stock price over the next 12 months.
“We resume coverage of Access Bank with a Buy rating and target price (TP) of N15/share. With the strongest potential earnings growth over the forecast period, Access Bank is the top pick in our universe of Nigerian banks,” Dubai based Mukuru said in an update of financial forecasts.
“At a current valuation of 1.02x its 2013 estimated book value per share (BVPS) and 5.0x its 2014 estimated earnings per share (EPS), we believe that the market is overly discounting its ability to build its returns to at least 21.5 percent by 2017 estimate (from 19.1 percent at FY12) and grow its share of system profits to 11 percent of total by 2017 (from 8 percent in FY12),” Mukuru said.
UBA was also mentioned as a top pick for Citi for standing out as the only Tier 1 bank with an asset share (11 percent) higher than its profit share (10 percent).
“Following our earnings upgrades, we raise our fair value
estimate for UBA to N11/share (from N8.50). We raise our 2013, 2014 and 2015 EPS forecasts by 31 percent, 18 percent and 20 percent,” Mukuru said.
Overall with Nigeria’s Tier 1 banks trading on a 2013 price to earnings P/E of 6.93 xs with a 2013E return on assets RoA of 2.72 percent, they remain very attractive within a CEEMEA context according to Mukuru.
“We think one should BUY the banks that will own the bulk of the system’s profit pool in 2017 – the Tier one banks.”
Using estimates of each Tier 1 bank’s profit shares, the top-down value of the Tier 1 banks is N3.2 trillion ($21bn); 1.85x its 2013E book value and 7.3x its 2014 earnings, according to Mukuru.
This compares with the current market valuation of N2.7 trillion ($17bn) for the five tier one banks; First Bank, Zenith, GTB, Access and UBA.
The valuation also compares favorably to Citi’s universe of CEEMA banks which trade on a 2013 P/E of 8.82 xs with a 2013 RoA of 1.97 percent.
Nigerian bank shares have had a great ride over the past 15 months, with bank stock prices up 112 percent on average.
Mukuru says 15 months ago, Nigerian banks were a straightforward play on earnings recovery, supported by a strong macro environment and rising rates and the call then was simply to pick the stock with the strongest potential RoAE recovery and largest sector discount.
However today, the expected RoAE pick-up (on average) across the banks is only 2pps (from 23 percent in 2012 to 25 percent in 2017) and banks are no longer trading on heavy discounts to historical averages.
So, tomorrow’s equity story is a play on profit share growth -over the next five years- which the tier one banks will dominate, according to Mukuru.
Citi values the potential size and profit of the banks in the future by assuming asset penetration of the banking system increases to 68 percent of GDP by 2017 (from 49 percent of GDP at FY12), banking system profits are also expected to grow to N1.042 trillion by 2017 ($7bn) from Citi’s estimate of N481bn ($3bn) in 2012 (a 2012-17compound annual growth rate CAGR of 17 percent), which will translate into a 2017E RoA & RoE of 2.11 percent and 22 percent, respectively.
Zenith and First Bank are rated a buy and are Citi’s preferred long-term plays on the Nigerian banking system because of their strong customer brands, liquidity and solvency , while GTB is a Neutral, according to Mukuru.