Access Bank Plc, Zenith Bank plc, Guaranty Trust Holding Company (GTCO) Plc, and Fidelity Bank Plc will be the first beneficiaries of a change in market fortune as the sector continues to underperform the broader market.
Chapel Hill Denham in a recent report to clients said it is imperative that investors take off the attractive entry point for its aforementioned preferred banking names as these opportunities will not lay around in perpetuity.
“Thus we reiterate our preference for Access, Zenith, GTCO, and Fidelity in the tier 2 space. We believe these stocks will be beneficiaries of a change in market fortune,” said analysts at Chapel Hill Denham.
Access, GTCO, and Zenith, trade at a price to book ratio of 0.4, 0.7, and 0.50 respectively, while Fidelity trades at 0.30.
The NGX Banking index now has negative year to date returns of -3.65 percent. The NGX Banking index has been nose diving since late January on the back of uncertainty surrounding the 2023, foreign exchange risk, and a low interest rate environment.
It is not out of place to attribute the sector sell-offs to the punitive regulatory environment and lack of transformation policy as the central bank has imposed capital controls and refused to adopt a flexible foreign exchange policy capable of unlocking the potential in the economy.
For instance, the country’s cash reserve ratio of 32.50 percent which is one of the highest in the world, hurts lenders.
“This means Nigerian banks are having to work significantly harder than banks elsewhere in the world to deliver profitability, and get held to even higher expected return hurdles,” said Adesoji Solanke, an analyst at Renaissance Capital.
“Higher CRR hurts the banks’ liquidity ratios, compels them to borrow and take extra trading risks to generate supposedly “risk-free” income,” Solanke said.
Fitch rating, which has a negative outlook for the Nigerian banking sector partly because of the CRR policy, notes, “It dampens banks profitability and is credit-negative for the sector as it restricts lenders’ ability to lend,” thereby stifling access to credit for businesses.