High yields on government fixed-income instruments have positioned Nigerian banks as most efficient lenders among African peers. But in spite of this, investors still remain unenthusiastic about them, leaving the stocks behind in share performance.
Despite having lower valuations compared to peers in South Africa and Kenya, the banks performed better in terms of profitability and efficiency in making use of their operating funds in 2018.
Research by BusinessDay using data from Bloomberg and Financial Times on five 2018 most-profitable banks in Nigeria, South Africa and Kenya showed that Stanbic IBTC Bank and Guaranty Trust Bank (GTB) led African peers in terms of Return on Equity (ROE).
ROE measures a bank’s profitability by revealing how much profit it generates with the money its shareholders have invested.
“Income generation is a lot more robust in Nigeria and future income growth is faster in the country than in South Africa and Kenya,” said Aderonke Akinsola, a banking sector analyst at Chapel Hill Denham Securities.
“We really have high interest rate in Nigeria, yields on Nigerian Treasury Bills are double digits and that is not what we are seeing in South Africa and Kenya,” Akinsola said.
Besides GTB and Stanbic Bank, the Nigerian banks include Zenith Bank, Ecobank Transnational Incorporated (ETI) and Access Bank. For South Africa, the banks were Capitec Bank, Standard Bank, FirstRand Bank, NED Bank and Absa Bank (formerly Barclays Africa Group), while Kenya Commercial Bank, Equity Group Holdings Bank, Standard Chartered Bank and Cooperative Bank of Kenya were considered for Kenya.
In full-year 2018, Stanbic IBTC Bank had the highest ROE of 34.5 percent compared to 28.9 percent recorded in 2017.
Nigeria’s most capitalised lender, GTB, followed closely with an ROE of 30.9 percent in 2018 compared to 29.96 percent recorded a year earlier, while South Africa’s leading Capitec Bank and Kenya’s Equity Group Holdings both had the third-best ROEs of 27 percent in 2018, respectively.
“Nigerian banks have been very aggressive investing in Federal Government debt instruments,” said Johnson Chukwu, managing director of Lagos-based investment firm, Cowry Asset Management Ltd. “These fixed income instruments have minimal risks attached to them.”
Nigeria’s largest bank by assets, Zenith Bank, took the fourth position with ROE of 23.8 percent, South Africa’s First Rand Bank followed with ROE of 23 percent, while Kenya’s Commercial Bank occupied the sixth position having recorded an ROE of 21.9 percent in 2018.
Similarly, Access Bank booked an ROE of 19 percent to emerge seventh on the list, followed by Cooperative Bank of Kenya which recorded 18.33 percent ROE for the year.
ROE of South Africa’s Standard Bank Group stood at 18 percent in 2018, placing it in the ninth position, while another South African lender, NedBank Group, trailed with an ROE of 17.9 percent.
Nigerian mid-tier lender, ETI, had ROE of 17.8 percent, Absa Group Limited in South Africa recorded 13.4 percent, while Kenya’s Standard Charted Bank only achieved 6.8 percent for the year.
While the Nigerian banks, which are considered as the most liquid stocks on the Nigerian Stock Exchange (NSE), best utilised shareholders’ funds to generate returns in the review year, they still largely lag behind their African peers in terms of stock valuation.
The five Nigerian banks considered had an average Price-to-Book (P/B) ratio of 1.08x, compared to the five South African lenders with an average P/B ratio of 3.07x, and Kenyan lenders with P/B ratio of 1.4x.
The price-to-book ratio compares a stock’s market value to its book value. A lower P/B ratio indicates that the stock is undervalued.
Akinsola explained that the unimpressive share performance in the Nigerian banking stocks compared to other African countries was in line with the general market trend having lost over 26 percent in the last one year.
“Until we see the economy growing at a faster rate, which will probably be driven by government policies, it will broadly be the same happening for the banking stocks,” Akinsola said.
In the last one year, Stanbic IBTC Bank with the highest ROE in 2018 had shed 5.61 percent to settle at N46.25. GTB, which is the second-highest in terms of ROE, has a year return of -21.06 percent, while Zenith Bank’s one year return stood at -22.41 percent.
“You will observe that investors are shying away from the Nigerian equities, which will reflect in the valuation of those companies,” Chukwu said, explaining that investors have a stronger preference for South African and Kenyan stocks, causing them to have higher P/B ratios compared with Nigerian equities.
In South Africa, Captec Bank rose 65.77 percent in the last one year, while Absa Bank had a one-year return of 9.1 percent. Kenya Commercial Bank had dropped 12.82 percent, Equity Group Holdings was down 17.03 percent, while Kenya’s Standard Chartered Bank lost 12.71 percent.
DIPO OLADEHINDE & OLUWASEGUN OLAKOYENIKAN
