The current downturn in the equities market is an attractive entry opportunities for investors to buy the stock of tier 1 lenders. This is because their stocks are trading below the intrinsic value.
Analysis by Market and Intelligence reveals that big banks are trading at a discount to their respective 5 year price to book value (P/BV), as analysts expect lenders’ full year profit margins and return on equity to improve.
For instance, Guaranty Trust Bank (GTBank) has a P/BV of 1.8 as at Jan, which is lower than the 5 year P/BV average of 1.90. Zenith Bank Plc has a P/BV of 0.80, which is lower than its 5 year P/BV average of 10.0.
United Bank for Africa (UBA) Plc has a P/BV of 0.50, which is lower than its 5 year average of 0.70. Access Bank Plc has a P/BV of 0.30, this compares with its 5 year average of 0.60. First Bank Holdings has a P/BV of 0.40, this compares with 5 year average of 0.50.
The local bourse has been under pressure since mid-2018- as investors dump shares over election jitters while the trade spate between China and the United States, and continued rates hike by the U.S Federal Reserve have made Naira assets less attractive to investors foreign investors.
The NSE ASI has shed -1.35 percent since the start of the year while Banking index has year to date (YTD) -4.87 percent
The economy has been growing sluggishly.
Nigerian Gross Domestic Product (GDP) of 1.80 percent is less than 2.0 percent, but some analysts expect a rebound to solid growth in the third quarter of 2019- after the elections-Also continued rally in crude oil price and foreign availability will help add impetus to the economy.
Profit of big banks have been growing at a slow pace since the start of 2018 compared to 2017, 2016, 2015, when the devaluation of the currency and high yield environment bolstered bottom line.
Procrastinators have divergence of opinion over future earnings, but they concur that performance of lenders depend on improved market conditions.
“Banks are unlikely to post large gains in profit this year. They are unlikely to experience much loan growth, given the weak economy and the fact that they can benefit from T-bills yields,” said analysts at Coronation Research.
“So, if interest rates come down later in the year and the market conditions improve, and then there could be a sharp rally in bank stocks later in the year,” said analysts at Coronation Research.
Combined profit of 13 largest lenders were up 13.80 percent to N573.27 billion in the third quarter of 2018, this compares with 17.911 percent uptick in 2017 financial period, but higher than 13.39 percent recorded in 2015.
Kayode Tinuoye, fund manager with United Capital Research however said that banks performance this year will be better than 2018 as he expects yields to be higher.
He added that lenders are more cautious in giving loans because they are still recovering from the financial crisis of 2016 that resulted in deteriorating assets quality and accumulation of loan loss expense.
