Banking Index Up 54.80% YtD on FX Unification, Corporate Earnings

Kayode Tokede

Following the economic reforms by President Bola Tinubu headlined by foreign exchange unification and impressive corporate earnings, the Nigerian Exchange Limited (NGX) Banking Index gained 54.08 per cent Year-till-Date.

The banking index, according to THISDAY investigations is behind the NGX Oil & Gas Index and NGX Consumer Goods which have appreciated by 103.22 per cent and 80.50 per cent YtD, respectively.

Investors positioned in the banking stocks between June and August following the Central Bank of Nigeria (CBN) naira unification policies that have attracted more foreign investors’ participation who rushed to take position in banking stocks that were before now undervalued.

Analysis of trading activity showed that the Banking Index between June and August 2023 has appreciated by 23.5 per cent to 646.29 basis points following a surge in prices of Sterling Financial Holdings Company Plc, Unity Bank Plc, Stanbic IBTC Holdings Plc, Access Holdings Plc, Zenith Bank Plc, Guaranty Trust Holding Company Plc, among others. 

The stock price of Unity Bank emerged top three gainers, followed by Sterling Financial Holdings Company and Stanbic IBTC Holdings.

Unity Bank appreciated to N1.22 per share as of August 2023, an increase of 130.2 per cent from N0.53 per share it opened in June 2023.

Sterling Financial Holdings Company, formally Sterling bank closed August 2023 at N3.34 per share, an increase of 62.9 per cent from N2.05 per share it opened for trading in June 2023, while Stanbic IBTC Holdings closed August 2023 at N65.00 per share, an increase of 62.5 per cent from N40 per share it opened for trading in June.

 With the uncompleted takeover of Union Bank of Nigeria by Titan Trust Bank Limited, its stock price has depreciated by 9.7 per cent to N6.50 per share as of August 31, 2023 from N7.20 per share it opened for trading in June 2023.

The Managing Director, Wyoming Capital and Partners, Mr. Tajudeen Olayinka said the unresolved issues around Union Bank of Nigeria acquisition, possible probe of the acquisition process by the government, and proposed delisting from the NGX is responsible for the limited price movement in the period.

Also, UBA, Access Holdings and GTCO have appreciated by 41.4 per cent, 34.96 per cent, 27.87 per cent when the CBN pronounced its foreign exchange liberation policy.

Also contributing to growth in stock prices is impressive corporate earnings.

The likes of GTCO, Fidelity Bank and Stanbic IBTC Holdings have so far declared interim dividend for half year ended June 30, 2023.

FBN Holdings declared N206.3billion profit before tax in its unaudited H1 2023, a record high from the oldest financial institution in Nigeria.

This is about 213.8 per cent high when compared to N65.7 billion declared in H1 2022.

Analysts at Coronation Asset Management in a report titled, “Investment Opportunities from FX Liberalisation,” said banking stocks might repeat the 2017 scenario when foreign exchange rates convergence stimulated the performance of banking stocks.

The report said, “Bank stocks performed well in 2017 and we think that they will perform well again in 2023, given that most of the major listed banks hold net long positions in United States dollars and will report translation gains. We also think there is a chance that bank regulations affecting naira liquidity will be eased.”

They noted that there were also many differences with 2017 pointing out that by mid-2017 the economy was emerging from a five-quarter recession and the appreciation in the parallel exchange rate improved business conditions.

The analysts added that foreign investors are still a significant factor in the Nigerian equity market in 2017; much less now, although recent data showed a net inflow of foreign investment into the stock market.

They noted that the monetary authorities were also able to engineer market interest rates above the rate of inflation, something to which investors usually respond positively “@This begs one question about the second half of 2023. Which way are interest rates going to move?

“A liberalised foreign exchange rate points to elevated interest rates in order to make it worthwhile holding money in naira. Fuel subsidy removal, effective May 31, 2023 suggests that cost pressures will push inflation upwards, which also argues for elevated interest rates. Against this, the All Progressives Congress (APC) manifesto proposed low interest rates to encourage economic growth. We do not know, at this stage, how the APC administration and the Central Bank of Nigeria will resolve this critical area of policy.

“On the bright side, the removal of fuel subsidies and the liberalisation of the naira foreign exchange rate are historic events, and will themselves straighten out much of the dysfunctional economic behaviour we have become accustomed to,” Coronation stated.

They added that the reforms embarked upon by the President Bola Tinubu’s administration, “are good for the economy and in the long run are good for markets”.

Drawing up a model equity portfolio, analysts included overweight for banking sector which they believed would benefit from liberalisation of foreign exchange rates, given that most of that large listed banks have net long positions in dollars.

According to analysts, it is also possible that some of the very restrictive banking regulations affecting naira liquidity in banks may be unwound by the new administration, given its pro-growth stance.

They expressed that Nigerian banks routinely record gains/losses depending on their balance sheet exposure to foreign exchange

They added that, “Following the recent FX liberalisation which has seen the value of the Naira dropped by circa 40 against the US dollar, we expect banks with net long US dollar balance sheets to book significant FX revaluation gains.”