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Nigerian Banks Offer Attractive Valuations as Q4 Earnings Season Begins

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Nigerian banks have the most attractive valuation among African peers, which signals an entry level for investors, but rising impairment charges will weaken earnings in 2021.

The average price to book ratio-which helps investors find a company’s value by comparing the firm’s book value to its market value-stood at an average of 0.68 times for the Nigerian industry.

That compares with Morocco, (1.4x); Kenya, (0.95x); South Africa (1.51x), and Egypt, (0.72x), according to data from CSL Stock Brokers Limited.

Nigerian banks, struggling with a punitive regulatory and macroeconomic environment, have utilized the resources of their owners in generating higher profit than their African counterparts.

Average return on average equity stood at 15.50 percent, that compares with South Africa, (11.20 percent); Kenya, (7.50percent), and Morocco, (7.10 percent), respectively.

Investors have always been attracted to Nigerian Baking stocks because of their best in class dividend and higher than expected earnings despite the effects of the coronavirus pandemic.

Last year, they were among the star performers on the Nigerian Stock Exchange (NSE) All Share Index (ASI) as Guaranty Trust Bank delivered (+28.30 percent) and Zenith (+50.40) year to date in 2020.

However, the number of bank customers that could not meet obligations rose as lockdown policy imposed by government halted business activities, and there are indications of lower recoveries as collateral loans will prove more difficult.

The largest banks in Africa’s largest economy incurred N128.66 billion in impairment charges in September 2020, a 42 percent increase from 2019’s N90.33 billion, according to data gathered by MoneyCentral.

And lenders that have released full year 2020 results are showing the same pattern of accumulated loan loss expenses.

Stanbic IBTC Holdings’ impairment charge on financial assets surged by 508.13 percent as at December 2020; Fidelity Bank, (+397.15 percent), and Sterling Bank, (+124.15 percent), according to data compiled by MoneyCentral.

Despite expectations of rising loan loss, analysts are optimistic that noninterest income will get a boost due to uptick in transaction volumes following revised fee guidance on electronic transactions that took place in 2020.

The expectation of higher returns in the form of dividend is anticipated to lure investors to the shares of big banks who have robust earnings and reserves to finance such distribution.

Zenith has dividend yield of (+10.77); GTBank, (+8.59 percent); UBA, (+11.35 percent), and Access Bank, (+7.56 percent).

The rates on fixed-income securities are expected to remain low through the first half (H1) of 2021. This will pressure interest margins (NIMs) and create strong headwinds to income growth, according to analysts at Cordros Capital.

“The confluence of the factors stated, as well as a lack of meaningful revision to the application of regulator rules, will force banks to find new pathways to profitable growth away from the traditional sources of income; early movers will have the advantage,” the analysts summed.

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