Biggest banks dominate trillion-naira club as stocks soar

Three of Nigeria’s biggest banks have seen their market capitalisation hit the N1 trillion mark this year as stocks posted huge gains in the first six trading days before their winning streak was broken on Wednesday.

The elite club of companies with at least N1 trillion market capitalisation has swelled in recent months, from five members before President Bola Tinubu’s reforms to 11 on Tuesday.

This year, the United Bank of Africa Plc (UBA) became the first to join the club as its market value reached N1.02 trillion on Monday. It was followed by Access Holdings Plc and FBN Holdings Plc, whose market cap rose to N1.06 trillion and N1.03 trillion respectively on Tuesday.

As of Wednesday, there were three banks in the club, two cement makers, two telecommunications companies, one energy producer and one food company. The number of banks dropped from five on Tuesday as Access and FBN saw their valuation fall below N1 trillion on Wednesday.

Last year, Zenith Bank Plc and Guaranty Trust Holding Company Plc (GTCO) staged a comeback following the stock market rally sparked by the removal of petrol subsidies on May 29 and the reform of the foreign exchange market in June. Seplat Energy Plc also notched a N1 trillion valuation.

The other members of the club are Airtel Africa Plc, MTN Nigeria Communications Plc, Dangote Cement Plc, BUA Cement Plc and BUA Foods Plc.

The stock market rose for six straight days, with the All Share Index of the Nigerian Exchange Limited rising to 83,191.84 basis points (bps) on Tuesday from 74,773.77bps at the end of last year. It fell for the first time this year on Wednesday.

“I think that on the back of what investors witnessed in 2023 with significant jump in earnings due to revaluation gains, there seems to be optimism that banks will be able to increase their dividends for the full year 2023,” Gbolahan Ologunro, portfolio manager at FBNQuest, said.

He recalled that GTCO, Zenith, Access and UBA increased their half-year 2023 dividends.

He said the significant rally seen on banking stocks this year has been supported by investors taking positions ahead of full-year 2023 numbers.

On the performance of the broader index, Ologunro said: “Investors are also buying this year due to fear of missing out; inflation was very high last year and for those that invested in the stock market were able to beat inflation because no other asset class offered returns that high.”

He said banking stocks and many others including cement shares have seen strong buying interest this year.

“Basically, the market is generally excited at the moment. You can literally handpick any stock and in a few days, you are up and smiling because you’re in the green,” Olaolu Boboye, economist and fixed income strategist at CardinalStone, said.

“If you look at those banks, they are in a strong position. Target prices are still higher than what is currently trading in the market, which means that there are still upside. Maybe banks are leading the rally but others too are catching up,” he added.

Akintoye Oyelakun, portfolio manager at Pension Alliance Limited, believes investors are optimistic about the proposed bank recapitalisation. “People are generally expecting it to improve the resilience of the banking sector, improve their profitability and enhance their capital adequacy.”

Yemi Cardoso, governor of the Central Bank of Nigeria, said on November 25 that banks would be directed to increase their capital base because they are not liquid enough to service the $1 trillion economy President Bola Tinubu is aiming for in the near future.

“If they are raising more debt capital, they can be able to use leverage to improve their profitability; it might be equity or they balance it. So until we have a clearer picture/guideline from CBN, that’s when we can say if we will have a negative or positive impact,” he said.

The banks are trying to move ahead of time so that they can be well capitalised in their own way at a cheaper rate, Damilare Asimiyu, macroeconomic strategist and head of investment research at Afrinvest West Africa Limited, said.

“One thing that this current rise in their share prices will do is that by the time you consider their capital mix because their share price is so high, the proportion of their equity will be higher than debt,” he added.

Gloria Fadipe, head of research CSL stockbroker, pointed out that banks have been reporting good numbers, so investors “are positioning for their full year dividends which they believe will be very good”.

“When prices go up, capitalisation grows. The banks have been undervalued for too long. So, they are being re-rated,” she added.

According to Adeola Adenikinju, a professor of economics and president of the Nigerian Economic Society, the entry of more banks into the trillion-naira club is a very good development for the economy as it would make it easier for the CBN to have an adequate minimum level of bank recapitalisation.

He said that with the banks being more diversified and robust, they will be able to withstand vulnerabilities and risks and play in the international financial market to attract foreign investors.

“For the economy too, they will be able to support lending activities in the real sector because they are struggling, but in all, banks are now stronger than they were,” he said.

Ayodeji Ajilore, investment manager at ARM, said the broad-based interest in the stock market led to the increase in the banks’ market value.

“You can make a case that the banking sector will also get to attract attention, considering the issue of recapitalisastion which means they can take more risks. So, it also goes to the fundamentals of valuation, and investors are pricing those things all together into it as much as possible and as long as possible.”