Guaranty Trust Bank (GTB) and Stanbic Ibtc boast the best profitability metrics among industry peers and could prove good value for investment in a depressed stock market.
According to data pulled from the financial reports of 14 banks listed on the Nigerian Stock Exchange (NSE), GTB and Stanbic Ibtc outpaced other banks with a 27 percent return on equity (ROE) respectively, above industry average of 12 percent and approximately 4 percent return on asset (ROA) above industry average of 1.5 percent.
ROE measures of how well a company uses investments to generate earnings growth meanwhile ROA is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources.
As at Q3 2018, GTB recorded a net income of N142.22 billion which stood as the largest amount recorded amongst peers in the industry.
Its net income was driven by a surge in net gains on financial instruments, other income and a significant decline in net impairment loss on financial instrument.
Stanbic Ibtc on the other hand recorded a net income of N59.75 billion majorly driving by significant increase in non-interest revenue and net impairment write-back on financial assets.
Amongst banks that underperformed the industry in terms of ROE was diamond bank which stood as the worst performing bank with an ROE of 1 percent.
Others include Union Bank (5%), Wema Bank (5%), First Bank (6%), FCMB (6%), Sterling bank (8%) and Fidelity bank (9%).
Meanwhile, of 14 banks listed on the exchange, only 3 banks with the inclusion of Zenith bank outperformed the industry average of return on asset. Zenith bank recorded an ROA of 2.6 percent.
BusinessDay analysis of the financial risk or leverage position of Nigerian banks revealed that compared to an industry average of 7.2, six Nigerian banks had ratios above the industry average. This was arrived by dividing the total liabilities of banks by their total equities.
These banks include Ecobank (11.48), Sterling bank (9.17), Access Bank (8.6), Wema bank (8.24), UBA (7.8) and Fidelity Bank (7.7).
Conventional theory states that if a lot of debt is used to finance growth, a bank could potentially generate more earnings than it would have without that financing.
However, amongst tier one banks BusinessDay analysis revealed that banks with higher leverage ratios above tier one average returned to shareholders lower than tier one average returns to shareholders at 15 percent.
Access bank and UBA recorded leverage ratios above industry average at 8.6 and 7.8 respectively but returned 13 percent and 12 percent to shareholders.
With the exception of First bank, GTB and Zenith despite lower financial risk recorded 27 percent and 19 percent returns on equity higher than industry average.
First bank on the other hand recorded an ROE of 6 percent with a low financial risk of 6.68.
According to stock recommendation report released by Meristem on Monday, eleven banks were recommended as a buy option in 2019 namely Ecobank, FCMB, Fidelity, GTB, Stanbic Ibtc, First Bank, Sterling, UBA, UBN, Wema and Zenith bank.
David Ibidapo
