Stress test shows undervaluation of banks’ stocks

By JULIUS ALAGBE

The low stock prices being posted by most banks may continue into the coming year as there are no indications that the current price trajectory in the market will change given the tightening liquidity trend in the system. Experts say that the apparent undervaluation of the banking stocks in the market is external and not directly associated with their internal fundamentals.

CardinalStone Partner limited, an investment banking firm hinted that many deposit money banks (DMBs) in the country remain undervalued despite its positive stress test. According to analysts at the firm after adjusting for its model to reflect the impact of the headwinds expected in the second half of the financial year 2015, and even in 2016, many banks still remain undervalued relative to their peers.
Analysts at the firm noted that apart from Guaranty Bank Plc and Stanbic IBTC Plc that are trading at premium to their book values, other banks are trading at significant discount to book value.
In the financial market front however, due to demand for increasing corporate governance by market participants, investors’ sentiments are showing that some banking stock are viewed as high risk investment to be included in their portfolios.
Confirming the trend, CardinalStone made it known that with the mounting macroeconomic pressures investors are beginning to show aversion to banking counters. It further stated that special note is made of Tier 11 banks because of corporate governance worries.
Apparently the financial market is pricing the quality of financial services providers listed on the bourse into stock trading price. While the need to raise corporate governance bar cannot be over-emphasised, some banks are trapped in the euphoria of the associated costs.
Again, analysts are expressing dissatisfaction at the way some bank’s non-performing loans continue to rise. They feel that the trend may defeat the very essence of the objective of Asset Management Corporation if not tamed.
Specifically, they are wary of some banks with high exposure to the Manufacturing, Oil and Gas as well as retail sectors that are likely to have increasing defaults.  In its recent report, Analysts at CardinalStone Partners noted that they expect most banks earnings to decline in financial year 2015.
Also analysts at LeverageSolutions’ analysts’ forum held last week in Lagos also concurred that banks with exposure to Oil and Gas, Fast Moving Consumers Goods and some retail market may be further opened to increasing defaults. Invariably, this will reduce their financial year end 2015 profit declaration which would also have ripple effects on capital market performance.
On liquidity, the forum participants agreed that there may be some level of illiquidity in the banking sector. Well noted for the trend were the banks that are parading the market for capital injections.
But CardinalStone revealed that following the completion of capital raising exercises by a number of banks, most banks’ Capital Adequacy Ratios (CARs) are now above the regulatory limits; 10 percent for regional or local banks, 15 percent for banks with international licences, and 16 percent for the eight Systemically Important Banks.
The analysts then warned that few banks ‘just’ above the regulatory limit have to be careful of further asset expansion for the rest of the year as this will increase their risk weighted assets and consequently reduce their CARs.
A further devaluation of the Naira will also have the same impact on these banks’ CARs as a result of a higher Naira value for the dollar portion of their risk weighted assets.
Consequently, we note that banks that have been cautious of raising Tier I or Tier II capital in fourth quarter of 2014 and first quarter 2015 will probably consider raising capital soon. Stanbic IBTC announced a N20.4 billion rights issue in the first half 2015, while Sterling Bank confirmed that they will be raising Tier II capital soon.
Skye Bank Plc has also announced plans to raise N50 billion via a rights issue in the third quarter of the year 2015 given that its CAR of 15.1 percent which includes Mainstreet Bank which was acquired by Skye Bank in 2014 was just below the bank’s relevant regulatory limit of 16 percent.
The Central Bank of Nigeria had extended deadline for CAR adjustment demand in the recent time. However, the extension of the deadline for banks to ensure their CAR is above the regulatory limit still stay at 30 June 2016.  This, according to some banking experts, will however, provide a breather for possibly affected banks.
“For the banks that already undertook Tier 1 capital raising exercises, namely Access, Diamond, Sterling Bank, and UBA which raised N52.6, N50.4, N19.8, and N11.5 billion worth of equity respectively, we expect a diluted impact on their return on equity (ROEs) in financial year 2015”; CardinalStone hinted.
The investment banking firm further said that based on analysis, it forecasts a 0.8 percent, 1.3 percent, 1.3 percent, and 0.3 percent decline in Access Bank’s, Diamond Bank’s, Sterling Bank’s, and UBA’s return on average equities (RoAEs) respectively as a result of the new capital raised.
Meanwhile, the firm disclosed that it does not see earnings as a catalyst for the market in second half of the year as financial market continues moving southward.  Its position regarding the equity market front uncovers that the firm analyst’ do not expect the challenging macro backdrop to keep corporate performance weak.
“However, we envisage that the appointment of the federal cabinet will reinvigorate the economy and spur equities rebound in the fourth quarter of the year, considering the significantly depressed valuation of Nigerian equities”, it stated.
“Due to the potential negative impact of increased non-performing loans (NPLs), we are cautious of banks”, CardinalStone Partners added.