Business
Banks’ low valuation sparks industry concern
By JULIUS ALAGBE
Analysts at Chapel Hill Denham have said that the Nigerian bulge balance sheet deposit money banks are materially mispriced despite the history of stronger returns above peers in emerging and frontier markets (EFM). This, according to analysts, provides an upside to investors that take a position in some Nigerian lenders’ stocks, though the local market has remained largely unrewarding following bearish trends.
In its report, Chapel Hill Denham stated that the valuations of the Nigerian banks are cheaper than their peers in EFM based on their relatively lower price to book ratio (P/B), but the higher return on equity (ROE).
The firm cited that Kenyan banks, for instance, are trading on a price to book ratio (P/B) of 1.6times as against 0.7times for Nigeria, despite similar ROEs of 21.3% for Kenya and 21.2% for Nigeria market. Analysts said they also note a similar development in Egypt as Nigerian banks continue delivering stronger dividend yields than their peers in the EFM.
“While we may argue that Nigeria is suffering from key macros issues like FX illiquidity and flexibility amid subdued oil prices, we think the discounts are excessively high”, analysts at Chapel Hill stated.
Accordingly, the firm said it believes a re-rating of the sector is on the cards particularly considering its resilience in this challenging period of Covid-19. Chapel Hill noted that top Nigerian banks like GTB, ACCESS, Zenith and United Bank for Africa have reasonable earnings with a track record of mouth-watering profitability.
Equity analysts rated GTBank as buying as they forecast a price target of N37.50 for a seemingly most profitable lender in Nigeria’s financial service space. Chapel Hill explained that GTB’s return on equity (ROE) is the strongest in Nigeria and among the best across the EFM but trading at a P/B of 1.3x.
“This points to mispricing of the banks’ stocks in our opinion”; equity analysts at Chapel Hill Denham stated.
Explaining Chapel Hill’s position, analysts said given that GTB’s ROE of 27.1% is materially higher than the EFM average of 15.3%, the stock deserves some premium for the above-average ROE. Taking a 5-years view at GTB shows an average ROE of 29.6% as against EFM average of 15.6%.
“We believe a re-rating of the stock close to our 12-month target price of N37.50 will put the stock on a justifiable P/B of 1.93x”, analysts said.
Given GTB’s net long FX position of $1 billion, analysts said they expect revaluation gain to influence the financial year 2020 estimated profit after tax.
Meanwhile, analysts stated that over the medium-to-long term, they see management’s strategy to adopt a Holdco structure, which will comprise businesses such as asset management and insurance, underpinning earnings. Chapel Hill Denham also recommend Zenith Bank stock to investors following a 12-month price target forecast of N33.55.
The lender has traded at a year to date low of N10.75, which analysts considered as one of the best periods to have been aggressively overweight in the stock, as the P/B was 0.4x with an ROE of 23.8% compared to EFM average ROE of 15.3%. Chapel Hill said Zenith bank stock, however, remains cheap at a P/B of 0.6x.
“Given Zenith’s net long FX position of about $1 billion; we see FX revaluation gains and strong fee & commission income, uplifting profit after tax in 2020”, analysts said.
The investment firm explained that tight risk management and the proactive restructuring of the loans relating to vulnerable sectors, as well as the hedging of oil and gas loans, are key positives.
“We expect a re-rating of the stock towards our 12-month TP of N33.55, which indicates a P/B of 1.24x. We see management’s plan to compete for a market share of high-quality assets, amid cost efficiency, playing a major role in profitability over the medium term. In the long term, we believe further penetration of the retail market will enhance earnings”, analysts at Chapel Hill remarked.
Also, analysts expressed concern around the market price of the largest lender by total as a case in point. Expressing an opinion on Access bank, Chapel Hill said the largest bank by total assets and number of customers is best positioned to compete in the retail market. For the stock, the investment firm sets a price target of N9.97 per share.
Notably, analysts explained that the retail digital lending has continued to gain momentum, with 107% and 129% growth in transaction count and volume respectively achieved in 2019.
“We believe a bank with this strong retail play has a robust growth outlook and should be appropriately priced by the market”, Chapel Hill stated.
At an ROE of 17.8%, Access is trading at a P/B of 0.6x, indicating a discount to EFM average P/B of 1.4x with ROE record of 15.3%. Analysts explained that the largest lender’s management is well ahead of expectation on the synergies expected from the acquisition of Diamond Bank.
“This is considering the realisation of merger synergies of N60 billion (in form of recoveries, lower cost of funds, and contract renegotiations) so far from the expected synergy of N155 billion over 3 years. We see continued expansion of footprint across Africa as a growth engine over the medium-to-long term”, Chapel Hill said.
Currently, Access is trading closer to its year to date low price of N5.40 compared to its peak of N11.60. Accordingly, analysts said they see the current price as very attractive with our 12-month TP of N9.97 indicating an expected re-rating towards a P/B of 1.0x.
In the same category of the mispriced stock is the United Bank for Africa, a Pan-African lender with a strong footprint across the continent. Analysts forecast a price target of N8.29 for UBA, with up to 37% headroom to re-rate from current price level to its year to date peak of N8.90, almost the same as 12-month TP.
“We believe a re-rating of UBA – ROE of 16.2% and P/B of 0.4x – is not demanding to understand.
“For short-term profitability, we expect UBA’s non-interest income growth to be supported by increased customer switch to electronic banking channels”, analysts explained.
UBA’s retail strategy has strengthened the funding base of the bank, providing the foundation for lower cost of funds over the medium-to-long term.
“The Pan African footprint is also an indication of a strong long -term outlook”, analysts at Chapel Hill Denham stated.
