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Bank stocks are attractive despite CBN’s stringent regulations

Despite the stringent policies by the apex bank, Nigerian largest banks have a compelling valuation as there has been strong growth in profitability, revenue, and assets over the years.

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They also have the ammunitions to surmount the “winter”, even amid a low yield environment. Winter in G.R.R Martins best seller novel “Game of Thrones (GOT) epitomises a period of turbulence whereby a city is beset by famine and wars.

The five largest banks have an attractive valuation, as investors are upbeat that these stocks will rally during an economic boom.

Zenith Bank, Guaranty Trust (GTBank), Access Bank, United Bank for Africa (UBA), and First Bank Holdings, have an average price to earnings ratio of 3.11 times, lower than the 8.41 times price multiples for the Nigerian Stock Exchange (NSE) and All Share Index (ASI).

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

Interestingly, banks are value stocks as their market capitalisation is lower than the book value of assets.

For instance, the cumulative total market capitalisation of the big five is N2.56 trillion – which is 1.60 percent of Nigeria’s GDP, is lower than the 3.22 trillion total shareholders fund.

Value investing is the practice of buying stocks in companies that have market capitalisation lower than the book value of the asset.

The market capitalisation of a firm is derived by multiplying the share price of a stock by its total number of ordinary shares while book value is total assets minus total current liabilities.

Value stocks are a safe bet for investors as they provide good returns over a period and are considered fundamentally more stable.

The total assets of the largest banks stood at N26.55 trillion as at September 2019, which is 16.25 percent to the country’s GDP, while liquidity and capital adequacy ratios are within the regulatory threshold.

The recent stringent policies announced by the Central Bank of Nigeria (CBN) shouldn’t stoke investors fear as lenders have a way of making money even when other sectors are capitulating to a tough and unpredictable macroeconomic environment.

Firstly, between 2014-16, the devaluation of the currency was a boon for them as dollar denominated assets ballooned, adding impetus to profit, thanks to income from foreign exchange revaluation gains.

Second, between 2017-18, they took advantage of a high yield environment to augment revenue in the face of receding interest income loans and advances.

However, analysts say CBN’s new rules could expose lenders to systematic risk, though they are forced to resume their traditional role of banking.

Read also: CBN can try, but banks as financial inclusion champion not happening soon

Analysts argued that forcing then to lend to extend credit to risky sectors is tantamount to rising Non-Performing Loans (NPLs).

Nigeria banks are still reeling from bad loans in their books, thanks to the precipitous drop in the crude oil price of mid 2014 that stoked a severe dollar scarcity that paralysed business activity.

Last year, the central bank hiked the minimum loans to deposit ratio (LDR) from 60 percent to 65 percent with a December 2019 deadline.

As of September 2019, there were a few banks well behind the new floor – GUARANTY (54.0 percent), FBNH (54.2 percent), ZENITH (55.8 percent), WEMA (60.0 percent) and UBA (62.1 percent).

“By our estimation, these banks would need to create an aggregate of N2.11 trillion to meet the new floor, in which case we expect CBN penalties, said analysts at Cordros Capital Limited.

“We maintain our view regarding the level of risk being introduced to the system. We expect the cost of risk across the industry to spike going towards 2021FY, and NPL moderation to temper as well following an initial dip that will follow the significant loan growth,” said analysts at Codros Capital.

The Apex bank also enacted other policies that will impact banks in 2020, including (1) limiting of borrowing clients (corporate and individuals) of banks from accessing OMO auctions, and (2) stopping domestic corporates and individuals from purchasing OMO bills in both the primary and secondary markets.

As mentioned earlier, Nigerian largest banks otherwise known as Tier one lenders have the ammunition to fend off the effects of CBN’s draconian laws.

Guaranty Trust Bank, the largest lender by market capitalization, has remained resilient in 2019 and is on track to post a good full year (2019) financial performance, supported by its industry-best efficiency (CIR).

While GTBank’s has the third largest bank by market capitalization, its market capitalization of N is the highest among peer rivals, which means it is sweating its asset in generating value for shareholders.

Analysts are sanguine that United Bank for Africa (UBA) record strong earnings in 2020 as they bet on contributions from the lender’s African businesses (ex-Nigeria).

Zenith Bank has maintained a strong level of performance through 2019, similar to recent years. The bank’s performance in 2019 was propelled by improved efficiency as top-line growth was muted during the year.

Analysts say this is encouraging and should be positive for trickledown to the bottom-line as the bank expands its risk asset portfolio over 2020.

FirstBank Holdings’ NPLs have declined precipitously in 2019, thanks to years’ long sterilization of the bank’s loan portfolio. It was able to reduce its legacy debts, most which were incurred during the economic downturn of 2016.

Analysts say earnings will get a boost in 2020 as the lender has drastically reduced loan loss expenses.

Access Bank has now grown into the largest Nigerian bank by asset size (NGN6.61 trillion) after its merger with Diamond Bank PLC. An excellent risk management strategy resulted in a reduction in NPLs despite inheriting huge bad debts from Diamond bank.

Last week, Access Bank acquired Kenya’s Transnational Bank, as it seeks high interest asset across the continent.

The largest lender by assets has operations in seven African countries and Britain as wells as representative offices in China, United Arab Emirates, Lebanon and India.

It plans to expand to Cameroon, Mozambique and Sierra Leone this year following the acquisition, the bank’s spokesman said.

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