A new banking report by the Coronation Asset Management in 2021, has revealed that Nigerian Banks’ stock values are cheaper when compared to Ghanaian and Kenyan bank stocks.
The report which is a 10-year study of the margins and profitability of six listed banks: Zenith Bank, GT Bank, Access Bank, FBN Holdings, CAL Bank, and GCB, examined what has happened within the Ghanaian and Nigerian Banking industry in the last 10 years.
The report noted that in terms of valuations, and despite a significant rally in share prices over the past years, Nigerian bank stocks look remarkably cheap, both in relation to other Sub-Saharan African banks and in relation to their own valuation history.
Five years ago, the median prospective price-to-earnings (PE) ratio was around 5.0x. Now it is 2.5x. This downward shift in ratings has exposed meaningful value for today’s investors.
According to the report, four of the banks’ shares changed very little over 10 years, but for Access Bank, there is a significant market share gain and for FBN Holdings, a remarkable shrinkage in its relative standing.
The report also showed that Nigerian banks’ earnings have been remarkably resilient over the interest rate cycle and their profitability is improving over time.
Czartoryski, a Senior Research Analyst at Coronation Research noted that the adaptation of the banks over the years, with regard to interest rate sets them for higher rate in, the remaining year.
“These banks have adapted successfully to many changes in interest rates over the 10 years from 2010 to 2020. Therefore, they are well-positioned for the rise in rates in the last quarter of 2021.
“While underlying growth in assets has been elusive, especially when data are adjusted for inflation, profitability has generally improved. The return on average equity (RoAE) and return on average assets (RoAA) of the six banks studied have both converged and improved over 10 years.”Czatoryski
Czatoryski noted that the trend appears to be under-appreciated by investors, and the report shows the positive investment potential in the sector.
On interest rates, the survey expressed fears that financial institutions that depend on short-term funding in the marketplace, and that have relied excessively on duration trades for their asset yields, could be facing problems this next year. It bases on what it calls “precipitous fall in market interest rates”.
The report further stated that in the Nigerian market, the first half of 2021 experienced a fall in interest rate. The report, however, indicated that it expects the Naira dominated interest rates to rise again.
“The first half-year saw a precipitous fall in Naira-denominated market interest rates, and the third quarter is seeing them rise again. Last year saw 1-year T-bill rates fall from 5.40 per cent per annum in January to 0.15 per cent in early December. At this point, at the end of 2020, the Central Bank of Nigeria (CBN) effectively put a floor under rates by issuing Special Bills to banks at a rate of 0.5 per cent per annum.”The Report