Nigerian Banks Half-Year 2011 Appraisal: An Analyst Viewpoint -
July 06, 2011; Thaddeus Investment Advisors & Research Ltd
We have assessed all listed banks on the Nigerian Stock Exchange (NSE) from a purely stock market perspective for the period January 4th, 2011 - June 30th, 2011. In simplistic terms, we are assessing banking' stocks (volatility, price performance etc) and not the actual banks from a company perspective. We will not lay out all the data behind this analysis due to the loose nature of this medium. We will provide enough information to make the appraisal and its findings useful. We shall focus on being as concise as possible. Kindly take note.
The top five banks with the highest volatility (price movement relative to NSE index movement) among the 21 listed banks are sanctioned banks: Fin Bank, Oceanic Bank, Bank PHB, Intercontinental Bank and Union Bank. This tie into our observation that a comment in the newspapers can move all sanctioned banks in a particular direction within twenty-four hours depending on the perception of the comment. Out of the top eight banks with the highest volatility, six are sanctioned banks. The other two are UBA and Stanbic IBTC Bank. UBA (6th highest volatility level) given its FY 2010 result which was outside the normal curve of expectations of everybody and its size does not surprise us with its level of volatility. Stanbic IBTC had the seventh highest volatility number among banks over the past six months with the third lowest average volume traded among all 21 listed banks over the six month period. Only Ecobank (lowest free float in the industry and a relatively poor result for FY 2010) and Spring Bank (most illiquid banking stock, troubled before August 2009 and sanctioned) had lower average volume traded among all banks over the first six months of the year. Despite having the third lowest average volume traded and the seventh highest volatility level, Stanbic IBTC Bank had the second best price performance (0.00%) among all banks as of June 30, 2011.
Six banks (Fidelity, GT Bank, Access, Diamond, Skye and Ecobank) traded more on the first trading day of the year (January 4th, 2011) than their average volume traded during the first half of 2011. Three of them (Skye, Ecobank & GT Bank) had volatility levels less than one and had three of the four lowest (all less than one) volatility levels in the banking industry during the first half of 2011. This implies that lower average daily volume traded bank stocks relative to the first trading day of the year (January effect) have a high propensity to have low volatility levels.
The top three most traded stocks on the first trading day of this year (Fidelity, GT Bank & Zenith) have the three best price performances for this year excluding Stanbic IBTC which has the third lowest volume traded among banks for the first day of the year. The "January effect" told a true story this year.
The five worst price performers for the first half of 2011 are sanctioned banks (Intercontinental, PHB, Oceanic, Afribank and Union). The fourteen worst price performers over the first half of 2011 are banks with single digit stock prices; they all have double digit negative returns. The fifteenth worst price performance (First Bank) has a double digit price and a single digit negative price performance. Apparently, targeting the three banks that have double digit stock prices (GTB, Zenith & First), will protect investors on the downside even if an upswing does not happen. GT Bank had the best price performance (the only bank with a positive price performance) of all banks (+13.7%) and Zenith (-2.3%) and First Bank (-9%) had single digit negative price performances. Overall, one bank had a positive price performance, one neutral (Stanbic IBTC) and the nineteen other banks had negative price performances with five of them in single digits.
No bank stock had a closing price higher than its volume-weighted average price (VWAP) during the first half of 2011. By implication, all bank stock prices are likely to further decline to varying degrees this year rather than rise. The four bank stocks with VWAPs nearest (all single digit differences) to their closing prices as of June 30th, 2011 had the best price performances among all listed banks excluding GT Bank.
Stanbic IBTC had the fourth highest VWAP among all listed banks and the third lowest average daily volume traded as earlier mentioned. The three other banks with higher VWAPs (GT Bank, Zenith & First) are among the top four bank stocks with the highest average daily volume traded in the industry. It is also interesting to note that Stanbic IBTC's VWAP is single digit while the other three VWAPs are in the mid-teens.
The four banks with the largest average daily traded volume over the past six months are the four biggest banks by assets as of December 31st, 2010 in Nigeria (First, Zenith, UBA & GT Bank) and the four banks with the most outstanding shares and unsurprisingly the most capitalized banks in the industry as of the half-year 2011 mark. Clearly, we see here the most interest in Nigerian banking stocks is in the BIGGEST BANKS (big in assets, outstanding shares and market capitalization and in stock price excluding UBA). There is clearly an overwhelming interest in BIG that is attracting domestic and international investors.
Investors appear to be targeting the BIGGEST banks in Nigeria regardless of the underlying performance of the bank. Flight to value by investors in the banking industry appears to be effected by flight to BIG and whatever that brings. This is why investors should continually expect perennial stock splits, expanding branch networks and a focus on managing shareholders over managing the business by bank directors.
After the four biggest banks, the next bank with the fifth largest average daily volume traded is the cheapest bank on the NSE (Fin Bank) as of June 30th, 2011 at N0.58. In other words, after investors focused on the four biggest banks in Nigeria, they went for the cheapest! Trading in Nigerian banks appears to be pretty simplistic and not complicated as it is made to be; buy the biggest banks and then the cheapest bank after that.
The fifth most capitalized bank (third lowest average daily traded volume) is Stanbic IBTC Bank which is not among the largest banks by assets or outstanding shares. Interestingly enough, the bank has joined the quest for size club and is expanding its branch network across the country at a frenetic pace flush with cash support from its parent company. Now back to market research; we continue to see signs through our analysis of abnormal behaviors of Stanbic IBTC's stock. The bank is the fifth most capitalized bank without the investor interest (measured by volume) the four banks above it have. Unsurprising thereof that the bank has the second best price performance among all listed banks as of half-year 2011 at 0%.
Out of all the seven sanctioned and two reprimanded listed banks, the biggest by assets of them all (Union Bank) has the highest stock price as of June 30th, 2011 at N2.70. Even when we switch to banks with a dark cloud over them, the trading interest in big banks with the highest prices remain!
Ecobank has the lowest average daily volume traded (excluding Spring Bank) and the lowest volatility level during half year 2011 among all the listed banks.
Between the two reprimanded banks (Wema and Unity) the less volatile bank (Wema) has a worse price performance and the more volatile bank (Unity) has a better price performance. This scenario has continued into the second half of the year.
In summary, while the biggest banks will not be the best banks when all is said and done, the biggest banks are definitely the most sought after banks. Three of the five most capitalized stocks on the NSE are banks; five of the top 10 most capitalized stocks on the NSE are banks. Clearly if you want to be noticed, you have to be BIG. How you go about it is secondary. Banks are now striving to be big on the NSE and big in the real world. As far as the NSE is concerned, you keep splitting your stock or manipulate your share price (easier to achieve with relatively thinly traded stocks) to remain on the radar of investors who clearly are inclined to purchase the most capitalized banks.
Three years ago the banks made up 60% - 70% of total market capitalization. Three years later, all listed banks made up 29.1% of total market capitalization as of June 30th, 2011. Excluding Dangote Cement, all listed banks made up 39% of total market capitalization as of June 30th, 2011. The drop in market significance for banks is not due to the listing of Dangote Cement but due to the significant decline in bank stock prices over the past three years. Why then do the banks still command so much attention by investor’s everyday when their overall market capitalization significance has greatly declined?
Here is the answer. Our stock market index is a market capitalization based index. The stocks with the highest capitalization have the greatest say in overall NSE index movement. Three banks are among the top five most capitalized stocks as of June 30th, 2011 and five are among the top ten most capitalized stocks. Investors are betting on market movement by taking position in the banks that impact overall market movement the most. Given that only one of the five banks had a positive price performance as of June 30th, 2011; it is no surprise that the overall market index has only gained 0.85% as of June 30th, 2011. While overall banking industry influence has reduced on the NSE, these five banks still play a significant role in determining the way the NSE index goes and this is why the banking industry is still very relevant despite its overall weakened position. The NSE All-Share index will not have a determined and sustained upswing if these five banks do not have a determined and sustained double-digit positive price performance. Despite the double-digit positive price performances of four of the top ten most capitalized stocks (Nestle, Nigerian Breweries, Guinness & Flour Mills), the NSE index still crawls at 0.85% as of June 30th, 2011. The banking industry remains relevant not because of the collective might of its constituents, but, because of the significance of a few banks. With all this contrived influence, banks in Nigeria will continue to get big because they CAN and not necessarily because they SHOULD.
Jude Fejokwu, Principal Analyst, Thaddeus Investment Advisors & Research Ltd.