The Nigerian equity market maintained its bearish streak in the previous trading session (Friday, July 5), down some 7 percent year long, amid the absence of positive catalysts to stimulate investor sentiments.
Following the rout in the market which has pushed a number of stocks to new lows, value investors are keen to identify cheap stocks with strong fundamentals and return potentials.
Determining cheap stocks require valuation which is critical in investment decisions, making it possible to ascertain the fair price of stocks.
Business Day carried out a simple relative valuation on banking stocks listed on the Nigerian Stock Exchange (NSE). These stocks fit this purpose as they are the most liquid on the exchange, accounting for about three-quarter of total equity market volume.
Several metrics can be employed for stock valuation, but price-to-book (P/B) ratio suits banking stocks, given the liquid nature of their balance sheet. P/B is used by value investors to identify undervalued stocks.
Price-to-book ratio compares a company’s stock price to its book value per share, and shows if investors are paying too much or less for what would remain if a company went bankrupt.
Conventionally, a stock with P/B figure less than one is considered to be potentially undervalued, however, value investors may often consider stocks with a P/B less than three as benchmark.
Methodology: Business Day compiled the P/B figures and book value (or total equity) per share of 12 banks.
From our computation, the sector’s P/B average 0.65, and was multiplied by each bank’s book value per share to ascertain each stock’s fair price or intrinsic value. A stock is considered under-priced if its market price way less than its fair price, and vice-versa
First Bank
The 125-year old tier-one lender is one of Nigeria’s valuable banking brands and operates along with four key strategic units, corporate, commercial, public sector and retail banking.
First Bank closed Friday’s trading 1.59 percent lower at N6.20. The lender’s P/B stood at 0.42, with book value per share at N15.14
Multiplying the sector average P/B of 0.65 with its 15.14 book value per share put the lender’s a fair price at N9.85, far less than its N6.2 market price.
Guaranty Trust Bank
Nigeria’s biggest lender by market value topped laggards after Friday’s close of business. GTB shed 1.69 percent to N29, down 14 percent year to date.
The lender has a P/B of 1.39 and multiplying this by its book value per share of N21.31 showed that its shares ought to be trading at N13.87.
Access Bank
Nigeria’s biggest bank by customer base climbed 1.52 percent higher to N6.7 per share, with 3 percent year-to-date losses.
Access Bank’s P/B stood at 0.41 and multiplying this by its book value per share of N16.22 put its fair price at N10.56, implying the lender is under-priced.
United Bank for Africa
UBA emerged the fourth-most active stock in which 28.6 million shares of the lender worth N172.9 million exchanged investors’ hand after Friday’s trading.
The tier-one lender has a P/B of 0.40 and multiplying this by its book value per share of N15.88 put the stock’s fair price at N10.34.
Zenith Bank
Nigeria’s biggest bank by assets shed 0.77 percent to close Friday’s trading at N19.35, down some 15 percent year long.
Zenith Bank has a P/B of 0.78 and multiplying this by its book value per share of N24.87 put the stock’s fair price at 0.78 percent.
Union Bank
The mid-tier lender declined 2.15 percent to N6.85 per share, with 2.14 percent loss year-to-date. Union Bank has a P/B of 0.88 and multiplying this by its book value per share of N8.01 put its fair price at N5.21, implying the stock is trading more than its intrinsic value.
