The Nigerian Stock Market has underperformed with YTD of -1.38 per cent. The banking sector has performed even worse with the NSEBNK returning YTD of -2.53 percent.
A research report on the Nigerian banking sector released recently by Afrinvest show that growth in the sector’s revenue has become slower over the last couple of years, declining from a high of 50 percent y-o-y in 2011 to 13 percent in the same period in 2013, as a result of regulatory headwinds.
Profit after tax in the industry has showed a mixed trend as a result of changes in accounting policy from NGAAP to IFRS for impairment charges.
Despite these abysmal results, several stocks are undervalued and poised for a rebound in the short to medium term.
According to Oscar Onyema, CEO, Nigerian Stock Exchange, “We are nowhere near a bear market. We anticipate that a lot of investors are on the sideline due to their perception of some risks relating to security and political situation – as they wonder where the economy is going from here.”
The Afrinvest report show that total deposits and total assets in the sector hit N19tn and N25tn FY 2013 respectively, with six banks controlling 70 percent of the market – Guaranty Trust Bank, Zenith Bank, First Bank, Ecobank, Access Bank and UBA.
There is still room from growth in the sector from the leveraging of IT infrastructure to lower cost and diversify the income stream, the strategic utilization of the cashless policy and financial inclusion policy to boost revenue and decrease sunk costs, and increased lending to SMEs and the real sector at relatively higher rates while raising capital at lower yields via the Eurobond market.
Looking at the Afrinvest report, 9 out of 15 bank stocks are assigned a “buy” rating. The stocks spread across Tier I and Tier II banks, are FBNH, UBA, Diamond, FCMB, Fidelity Bank, Skye Bank, Sterling Bank, Unity Bank and Wema Bank.
Furthermore, a research report released by Cardinal Stone Partners assigned 9 out of 12 banks with a “buy” rating. The nine banks Zenith Bank, FBNH, ETI, GTBank, Access Bank, UBA, FCMB, Diamond Bank and Skye Bank.
Another research report released by FBN Capital projects 3 out of 9 will outperform the market, with 5 out of 9 banks expected to earn returns in excess of 20 percent.
The 3 bank stocks are Access Bank, Diamond Bank and UBA, while the 5 bank stocks are Access Bank, Diamond Bank, Fidelity Bank, FCMB and UBA.
It is interesting to note that all three reports have FCMB, Diamond and UBA among those expected to earn high returns.
Equally interesting are the large number of stocks expected to earn significant returns, showing the disconnect between the depressed prices in the market and intrinsic value.
Over a 1 year period, the MSCI Emerging Market Banks Index recorded a P/B multiple expansion of around 7% to c.1.35x. Nigerian banks today are trading at a P/B of 1.1x, a discount of 18% to their overseas peers, lower than the discount of 12% recorded just over a year ago.
In terms of performance by the banks, the larger, safer names have commanded a premium. Specifically, GT Bank, Zenith Bank and Stanbic IBTC Holdings (Stanbic IBTC) have seen their P/B multiples expand by 8-9% to 2.5x (GT Bank) and 1.4x (Zenith), and 50% to 2.7x for Stanbic IBTC while the others have seen a contraction in their multiples by an average of 28%.
