• Friday, March 29, 2024
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BusinessDay

Cheap valuation makes Nigerian banks attractive to investors

9’M 2021: Tier one banks generate N71.9bn from account maintenance charges

Nigeria’s big banks are increasingly being featured in the stock recommendations of investment banks due to their valuations, which makes them some of the cheapest stocks in Africa.

Four of the five African stocks with the lowest price-earnings (PE) ratios among companies valued at $500 million or more are Nigerian lenders, data compiled by Bloomberg show. These banks include United Bank for Africa plc, Access Bank plc, FBN Holdings plc, and Zenith Bank plc.

The cheap valuation is more evidence of how a shortage of dollars shapes the attractiveness of stock values in the continent’s largest economy.

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).

In their recent stock recommendation, United Capital analysts see Zenith Bank as a good Buy with PE ratio of 3.3x; Access Bank (2.8x), and FBN Holdings (3.5x). Also, for Meristem equity analysts, UBA is a Buy, also with a low PE ratio of 2.1x.

The P/E ratio helps investors determine whether a stock is overvalued or undervalued. A high P/E could mean that a stock’s price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings.

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Investors have been able to beat returns from the Lagos stock market by buying higher yielding debt sold by the government to fund its widening budget deficit.

But it is the Central Bank of Nigeria’s curbs on the repatriation of dollars that are the biggest bugbear for foreigners and the key reason for depressed valuations, said Usoro Essien, an analyst at Rand Merchant Bank.

“The foreign exchange illiquidity has frustrated a lot of foreign investors, so the apathy is not just on banks but on the market in general,” Essien said on phone.

The West African nation’s stock market had a good 2020, climbing 50% as local pension funds barred by the state from trading in its most-lucrative short-term debt poured money into equities.

That liquidity has since largely dried up and the 151-member benchmark index is down 2.3% this year, with an index of the country’s largest banks sliding 3.7% as of Monday’s close.

Domestic investors may be drawn back to the lowly valued stock market if fixed-income yields prove unattractive, but that is unlikely to be enough of an incentive for non-residents, Essien said. “For the foreign investor, what matters most is the ability to exit at will,” he said.