A slump in profitability for the largest Nigerian banks from tighter monetary policy is leading to an erosion of shareholder value for investors.
The lenders’ returns, which peaked in 2012 have since receded amid a wave of regulatory constraints.
“When we calculate economic value added (EVA) for the banks, using a 19 percent cost of equity CoE, no bank created value in 2009. On a cumulative basis, only GTBank has created value since 2009, while all other tier 1 banks eroded value,” said Renaissance Capital Bank analysts, led by Adesoji Solanke, in a February 03 note.
“We think the tier 1 banks are inherently profitable but their earnings capacity is limited by the Central Bank of Nigeria’s (CBN) strive for macro stability. We therefore maintain our view that any significant near-term improvement in sector returns is likely to be driven by a loosening of monetary policy, particularly in terms of the cash reserve ratio (CRR).”
Full Year 2014 estimates for return on equity, a measure of how well shareholder money is reinvested, is 25 percent for GTBank (the largest bank by market capitalisation) and 18 percent for Zenith Bank. Other lenders come in below the 19 percent CoE.
On a cumulative basis since the 2009 banking crisis (up to 9M14), only GTBank delivered a positive EVA value, at N91bn, according to Rencap.
All other tier 1 banks delivered negative cumulative EVA, implying that the negative value created in some years, more than offset the positive value created in other years.
A firm’s cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.
A company that earns a return on equity in excess of its cost of equity capital has added value.
Nigerian lenders are the least profitable among the three major economies in Sub-Sahara Africa (South Africa, Kenya and Ghana), according to Bloomberg data.
The Nigerian Stock Exchange Banking 10 Index has lost -9.9 percent this year (February 05) compared with a 13 percent increase for South Africa’s seven – member FTSE/JSE Africa Banks Index.
Since the financial crisis, Nigerian banks have had to deal with higher capital requirements for given amounts of assets and tighter monetary policy in the form of an increase in the cash reserve requirements -the minimum cash, as a percentage of customer deposits that each bank must set aside as a reserve – from 4 percent in 2011 to 75 percent for public sector deposits in 2014.
The regulator also told lenders to lower fees and commissions to reduce costs to customers.
Returns in Nigeria, Africa’s largest economy, are driven by net interest margins, which have been crimped by the hike in CRR.
“The CBNs CRR policy has effectively kept N460 billion of First Banks funds at the apex bank, earning zero interest rates, instead of being available for lending,” said Bisi Onasanya, Chief Executive Officer, First Bank of Nigeria, at a Conference in Lagos last year.
The top five banks account for more than half the loans in Nigeria’s banking system.
Renaissance Capital attributes GTBs outperformance to its more efficient revenue generation and slightly more cost efficient operations.
Investors have put a premium on the lender by valuing it at 1.75xs book value, compared to 0.96 xs for Zenith, 0.55x for Access, and 0.46 xs for First Bank and UBA, according to Bloomberg data.
Nigerian banks’ asset growth and earnings will fall in the next 18 months because of the Central Bank’s moves to protect the economy and banking customers, Fitch Ratings Ltd. said in a October 2014 report.