Nigerian banks generate more returns to shareholders than peers

Despite stringent regulatory environment and the unprecedented macroeconomic uncertainties caused by the coronavirus pandemic, Nigerian banks have generated more returns for their shareholders than most of their peers in emerging and frontier markets.

According to recent report by Chapel Hill Denham Limited, GTBank’s return on equity (ROE) of 27.1 percent is materially higher than the emerging/frontier market (EFM) average of 15.3 percent.

GTBank’s ROE is even higher than the returns of CIB of Egypt, (24.30%); First Rand (South Africa ) 24.10 percent; Equity (Kenya) 21.90 percent; Banca (Romania), 21.70 percent; KCB (Kenya),) 20.70 percent; VTB (Russia) 20.30 percent; ITAU (Brazil) 19.90 percent; QNB (Quarter )19.0 percent, and Malayan (Malaysia) 10.40 percent.

According to the report, Zenith Bank, Stanbic IBTC Holdings, Access Bank, and United Bank for Africa, have ROEs of 23.80 percent, 23.30 percent, 17.80 percent, and 16.20 percent, respectively, which exceeds EFM average ROE of 15.30 percent.

Return on equity (ROE) measures how effectively management is using a company’s assets to create profits.

As a shortcut, investors can consider a ROE near the long-term average of the S&P 500 (14%) as an acceptable ratio, and anything less than 10 percent as poor.

In the last six years, Nigerian largest banks have consistently magnified earnings even amid macroeconomic headwinds that plunge the economy in a tailspin.

For instance, currency devaluations created dollar denominated assets that earned them foreign exchange gains. Also, they packed their money in short-term government securities when yields were high to realise income from treasury bills that underpinned earnings.

Analysts are of the belief that the adoption of a holding company structure such as asset management and insurance business combined with an excellent risk management strategy would continue to be major drivers of earnings.

In 2019, Access Bank acquired beleaguered Diamond Bank to emerge the largest lender by total assets and customers, paving the way for it to compete in the retail market.

“Notably, the retail digital lending has continued to gain momentum, with 107 percent and 129 percent growth in transaction count and volume, respectively, achieved in full year (FY-19),” note analysts at Chapel Hill Denham.

“We believe a bank with this strong retail play has a robust growth outlook and should be appropriately priced by the market,” according to the analysts.

Nigeria banks have cheaper valuation and better with returns relative to global peers, which means this is the time for investors to buy these stocks and make money in a period of economic recovery.
Kenyan banks for instance are trading on a P/B of 1.6x vs. 0.7x for Nigeria, according to Chapel Hill Denham.

Nigerian banks have more to worry about at the moment as the coronavirus pandemic and collapse of global oil price triggered currency devaluation, thus exposing them to more risk.

The World Bank disclosed in its latest World Bank Nigeria Development Update that Nigerian banks are now faced with serious risks of destabilisation, no thanks to what was aptly described as “the COVID-19 shock.”

The World Bank stated in the report that the pandemic could erode the generally positive performance recorded by the banks in 2019.

The Bank added that in specific terms, there was the risk of resurgence in banks’ non-performing loans (NPLs), especially as it pertained to loan exposure to the country’s gas sector.

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