CardinalStone Securities is keeping Buy ratings on four Tier-1 banks and six non-bank blue chips. The investment bank says the central bank’s record interest-rate cut will lift share valuations by lowering the discount rates investors use to price Nigerian stocks.
The Central Bank of Nigeria cut its benchmark rate by 350 basis points to 23% on September 22. CardinalStone said the move pushes down yields on government debt, which lowers companies’ cost of capital and the extra return investors demand for holding equities. In other words, the same future earnings are now worth more today.
Its Buy list covers Zenith Bank, UBA, GTCO and Access Holdings in banking, and UACN, Unilever Nigeria, Nigerian Breweries, HBM Nigeria (formerly Lafarge Africa), MTN Nigeria and Aradel Holdings.
Markets are already moving. The one-year Treasury bill rate fell to 15.89% at Wednesday’s auction, with bids of N4.09 trillion. The NGX All-Share Index closed at a record 252,149.78 points on Thursday and is up 62% year to date.
A simple MoneyCentral illustration shows the potential. Each 100-basis-point fall in the cost of equity would lift a typical Nigerian stock’s intrinsic value by about 7%. If the cost of equity fell by the full 3.2-point drop in bond yields, values would rise about 27%.
The benefits differ by sector. For banks, gains on bond holdings and cheaper funding will be partly offset by lower returns on Treasury bills, and the central bank still requires them to hold 45% of deposits in reserves.
Manufacturers such as Nigerian Breweries, HBM Nigeria and Unilever stand to gain most from cheaper borrowing. MTN Nigeria and Aradel look set to attract pension funds seeking returns as fixed-income yields fall.
Risks remain. Governor Olayemi Cardoso called the cut a “recalibration” rather than the start of cheap money, and food inflation is still at 19.57%. After a 62% rally, part of the benefit may already be priced in. The next policy meeting is on November 24.
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