Trading floor of the Nigerian Stock Exchange
By Obinna Chima
Investors seem not to be willing to stake their funds on equities listed on the banking sub-sector of the Nigerian Stock Exchange (NSE) due to the expectations of poor full year 2015 earnings from the commercial banks as a result of the weak macroeconomic environment.
The market is currently awaiting the full year earnings of banks. The prices of banking stocks that had been beaten down were further depressed recently. FBN Holdings Plc, which is widely seen as one of the industry leaders on the NSE, alerted the investing public that the group could record significant decline in earnings in its results for the year ended December 31, 2015. Therefore, it is believed that most banks would also post unimpressive results.
As a result of this, stock market investors have been edgy, thereby ignoring bank shares, which are trading at very low prices on the NSE.
For instance, Access Bank Plc’s stock price has so far declined by 13 per cent, year-to-date, from N4.85 per share as at January 4, to N4.20 per share as at last Friday, just as Zenith Bank Plc’s share price has dipped by 16.5 per cent year-to-date to close at N11.94 per share as at Friday, as against the N14.30 per share it was at the beginning of the year. In the same vein, at N3.11 per share as at last Friday, United Bank for Africa Plc’s (UBA) share price, which appeared undervalued, has also depreciated by 7.4 per cent year-to-date, compared with the N3.36 per share it opened the year, just as Guaranty Trust Bank Plc and FBN Holdings, closed at N15.99 and N3.62 per share respectively.
Recent publication of banks’ utilisation of foreign exchange being allocated to them by the Central Bank of Nigeria showed that divestment by foreign portfolio investors from Nigeria’s equities and bond markets accounted for a largest chunk of forex, in terms of value, bought by some banks as investors continue to express concerns over the country’s forex policy.
Firms such as BNP Paribas, Brown Brothers Harriman/Stanbic Nominees, HSBC Funds Services London, JPM London, JPM Securities, Northern Trust London, State Street/Stanbic Nominees, the Bank of New York, were some of the investment banks that recently exited the Nigerian equities and fixed income securities market.
The CBN and President Muhammadu Buhari have adamantly refused to endorse further devaluation of the nation’s currency.
With the elongated decline in crude oil prices as well as foreign exchange restrictions in the country, it is believed that Nigerian banks are facing significant asset quality risks that could crystallise in the near term. A report by Renaissance Capital (RenCap), which gave this verdict, also predicted that if the difficult conditions persist, there might be need for some banks to recapitalise or face forced mergers, with the regulator stepping in to coordinate the process.
However, the report listed these signs to include increased regulation and the recent revision of Basel 2 guidelines, which takes off 2-4 percentage points on average from the capital adequacy ratio (CAR) of some banks; the low interest rate environment, and what they described as the highly uncertain economic management direction.
Meanwhile, Lagos-based CSL Stockbrokers Limited in an analyst report titled: “Search for Safety,” urged investors to attempt bottom-of-the-cycle investments in Nigerian banks, given that their valuations either are, or have recently been, at six-year lows.
They revealed that their measure of basic valuation metrics in terms of historic price-to-book (P/BV) and in terms of franchise value (market capitalisation/deposits), found that the banks were trading below their six-year averages. “Investors who believe in reversion to the mean, or even in a degree of mean reversion, are likely to find these conditions attractive.
“However, Nigerian banks must first negotiate, and survive, 2016. Our thesis about mean reversion will not hold very well if a given bank undergoes capital restructuring in the meantime. Therefore we are interested in the banks with the least risk of encountering problems this year.
“In terms of risk (and specifically each bank’s ability to absorb cost of risk) we set the benchmark high, as we explain in the next section. In terms of valuation, the potential stock price increase implied by mean reversion is far above the 20.6 per cent potential we see in naira depreciation this year (from N199.0/US$1 to N240.0/US$1), so it still makes sense to us to invest in selected Nigerian banks even if we are expecting devaluation,” they added.