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…continental expansion dreams
All 13 listed Banks on Nigeria’s equity market have a market capitalization 10 times less than their South African peers, according to data compiled by MoneyCentral.
With both countries vying neck to neck for the title of Africa’s biggest economy, it serves as a reality check for ambitious Nigerian banks with continental wide expansion plans, suggesting that it would take a herculean task to unseat the more well established Banking giants down South.
Nigeria’s 13 largest banks have a market capitalization of $7.9 billion, which compares to $70.2 billion for South Africa’s six major listed banks.
While only 2 out of the 13 Nigerian banks trade above a price to book value (P/BV) of 1, almost all South African banks are trading above one-times book value, with Capitec Bank Holdings Ltd, the most expensive South African lender trading at a steep 4.82-times book value.
Why the lower valuation for Nigerian lenders?
Normally, relatively lower price to book value (P/BV) is interpreted as the stock being underpriced and relatively higher P/BV is interpreted as the stock being overpriced.
However, there is a deeper significance of this to banks.
For a bank, the macroeconomic conditions like inflation rate, rate of interest and liquidity are approximately the same for most of the banks operating in the same jurisdiction.
What differentiates one bank from the other bank is a function of how efficiently the funds or the assets are utilized and how best the spreads are managed.
More importantly, it is natural for bank assets to be subject to credit and other risks that can imply the potential for large, possibly abrupt losses, with loss provisions being made to report estimated credit losses as an allowance reducing the value of the loan portfolio and reported earnings.
If a bank is selling at book value, that means you’re buying it at a price equal to its equity (its assets minus its liabilities).
Nigerian Bank stocks are therefore trading at prices well below their book value per share because investors are taking into consideration the increased risks from bank’s activities in Nigeria’s uncertain macro-economic environment.
Investors were about a decade-ago burnt from a bad debt crisis in Nigerian banks, which has also led to depressed valuations.
For some Nigerian lenders such as Unity Bank there is an inability for investors to even calculate book value per share, due to a lack of trust in its balance sheet.
GTCO, Access, UBA continental expansion dreams face reality check
Guaranty Trust Bank Plc, Nigeria’s largest lender by market value, has been expanding its operations in the rest of Africa in the past three years in a bid to triple the pace of earnings growth.
The Lagos-based lender already has offices in 10 countries outside Nigeria including Kenya.
Access Holdings (HoldCo) Plc, which sees payments, pensions and insurance business as subsidiaries to help lead its next growth phase, and has operations in 16 countries, aims to become one of the continent’s biggest banks over the next five years.
“What the holdco strategy allows us to do is to look at new markets and new opportunities that the traditional bank does not allow us to do,” CEO Herbert Wigwe said at a briefing with reporters in Lagos in 2022.
“My sense is that by 2027, you will see us getting close to one of the top-5 banks in the continent,” from its current ranking of 12th.
Access Bank Plc last week announced the purchase of the African assets of Standard Chartered Plc, which includes operations in Angola, Cameroon, Gambia and Sierra Leone — countries where it’s already present.
Access is also taking over StanChart’s consumer, private and business banking division in Tanzania, widening its footprint to at least 17 markets.
The lender expects revenue from its home market to decline to 52% by 2027, down from 82% in September 2022, because of its proposed geographical expansion while the share of profit before tax from Nigeria will probably drop to 33% from 63%, it said in five-year strategy presentation posted on the website of the Nigerian Exchange.
United Bank for Africa Plc is another major Nigerian lender with a wide Pan-African footprint, offering banking services to more than thirty-seven million customers across 1,000 business offices and customer touch points in 20 African countries.
“The bottom-line is that the volatile operating environments in Africa will make it difficult for Nigerian banks to close the valuation gap with their South African counterparts anytime soon. There are issues of corporate governance, reporting, underlying business fundamentals. A lot of the South African lenders are built on decades old structures, which the Nigerian banks are just beginning to put in place,” a fund manager at a major investment firm said.