Though the combined profit, in excess of N720 billion, of the five top-tier banks on the Nigerian Stock Exchange (NSE) has remained strong, investors are showing apathy towards banking stocks.
The five banks, which are Zenith, Guaranty Trust Bank, FBN Holdings, United Bank for Africa and Access Bank, are currently trading at a value described by operators as very low compared to their fundamentals and the appreciable profits posted in their full year results.
It was learnt that the N720 billion profit by the banks in the 2018 financial year was not enough to woo investors to the sector as the pricing of these stocks has fallen below fair value.
In 2017 when the results of the five banks hit the market, with N606.1 billion full year profit, which was lower than the 2018 performance, banking stocks, driven by the tier-one banks, offered the best returns to investors in the equities market.
The banking sector of the NSE, which was rated second best bourse in Africa and 11th best in the world in 2017, gave equity investors a 73.3% return on investment in one year.
As at the first quarter of 2018, the banking sector was already on a positive trend due to the high demand for the stocks in the previous year. Now, it is a different scenario when compared to the current performance where the sector is still trading on a negative territory in the second quarter.
Operators have linked the poor valuation of these stocks to poor demand induced by weak economic growth, lack of policy direction and the stifling effect of the macro-economic headwinds on the market.
According to them, if government fails to create appropriate fiscal policies that will drive the domestic economy and generate more wealth for sustainable market rebound, the banking sector may not be able to withstand the current poor state of the economy. The operators based their position on the claim that the commercial sector and other key segments of the economy are currently performing poorly. They said the economic environment had deteriorated so severely that it could not support a viable capital market.
A breakdown of the 2018 performance of the five banks showed that Zenith Bank, which is currently trading at N20.90 kobo, took the first place with N231 billion as profit before tax while Guaranty Trust Bank took the second place with N215 billion trading at N34.80 kobo. UBA ranked third with a profit and stock price of N106.7 billion and N6.65 kobo per share.
Furthermore, Access Bank, trading at N6.85 kobo, made N103 billion as profit before tax. FBN Holdings rounded up the top five with a profit of N65.2 billion and trading value of N7.65 kobo for the 2018 financial year.
The NSE has been faced with an unprecedented lull since the first quarter of 2018. This is after the market had recorded a significant upsurge in 2017 with an increase of N4.5trillion in market capitalisation, which made it the third best performing stock exchange in the world.
In his reaction to the development, a stockbroker with the Royal Guaranty Trust Limited, Paul Uzum, said the impressive full year results of the five banks could not reflect on their share price as weak demand continued to threaten the stock performance in the market.
“GTB and Zenith are among the undervalued stocks and this underscores the fact that the equities market is currently undervalued. The pricing of these stocks is still a ‘far cry’ when compared to their fundamentals.
“The poor valuation is due to the unfavourable market condition and these are the best stocks we expect to be right-priced by both foreign and local investors.
“Zenith Bank which is giving an earning of over N6 should not be trading at N34.80 kobo while the Guaranty Trust Bank with an earning of over N6.50 kobo should be trading at price multiple of N10 which is close to N50 per share,” Uzum said.
According to him, “This is an indication of lack of confidence in the economy. People are scared of taking investment decisions in the markets. For such stocks, any investor who is investing on a long-term basis will not have any cause to regret it because stocks like Zenith and GTB will still give as high as about 13% which is the same percentage you get if you invest in government bonds.”
A stockbroker with APT Securities Limited, Muhammad Jamiu Kayode, said the banking sector had been impacted by the slow policy formulation of the existing administration.
“As at this time last year, we had a positive trend but as at today, we are still in the negative territory. After the election, the policy formulation by the current government has been so slow, not so fast as the market expected, and that is why some of these stocks are still trading below their fair value.
“The dividend yield is also still not encouraging due to harsh operating environment. The GTB in region of N6 is paying 2.75 kobo, Zenith Bank in the region of N4 is paying 2.75 and UBA is paying 50 kobo both interim and final. Access is paying 50 kobo both interim and final.
“Here, payout ration is very low compared to the prices they are trading in the market. Some investors are a bit disappointed, so they are not coming out to buy and it is currently affecting the market,” Kayode explained.
The Managing Director of High Cap Securities, Imafidon Adonri, also expressed concern over the undervalued state of the Nigerian banks.
According to him, there is the need for the economy to be properly structured and given a new direction so that all sectors would recover and impact positively on banks.
He said the banks belong to the service sector that provides for other areas of the economy, adding that if those areas are depressed, it would ultimately affect the income of the banks.
“This year, the five big banks have released their results. The banks are still very important in the market and we hope that they will still occupy their pride of place at least until the economy is restructured to be investment-driven.
“Their loan portfolio may become more delinquent if a number of beneficiaries cannot repay or pay back on the agreed terms and condition due to the weak economy. Then, due to the economic downturn, the opportunities available for them to finance will diminish and insecurity will also reduce investors’ confidence in the banking sector.”