Stock & Analyst Updates | |
Stock & Analyst Updates | |
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Monday, December 16, 2019 / 03:30 PM / By TheAnalyst,
with contributions from Proshare research unit and Associate analysts / Image Header Credit: Ecographics
As the year 2019 rolls up,
the investment returns on bank stock market prices have dropped lower than
historical averages. The year-to-date
(YTD) return on bank equity stock prices has mostly lagged behind the returns
on Fixed Deposit accounts. Recent analysis of seven banks show that average
returns on equity prices for these financial institutions over the last 12
months and five years have been below returns on fixed deposit placements.
Table 1 Year-To-Date 2019 and 5-Year Nigerian Banks Stock Price Returns
Source: Nigerian
Stock Exchange (NSE), Proshare research
However, there have been
some exceptions to the generally negative outlook of the relationship between
returns on bank stock prices and bank fixed deposit rates depending on the period
of reference. The year-to-date (2019) price returns on bank stocks have largely
been negative, UBA's year-to-date return in December 2019 is -15.0%, FBNH is -115.9%,
GT Bank is -16.6% Zenith Bank is -19.7%, StanbicIBTC Bank is -20.0%
and ETI is -58.1%. The best bank stock
yield on a YTD basis is Access Bank with a return of +21.2%
(see Table 1 above). This compares with returns on fixed deposit
(FD) of an average of +10.30% (till November
2019) and the yield on average Treasury bills for 2019 of +10.44%.
A look at the five-year
yield of banking stocks portrays a different narrative than the year to date
numbers. Access Bank's stock value on a 5-year basis, for example, gives a
price return of +50.9%, UBA gives a return
of +64.2% FBNH gives a negative return of -15.3%, while GT Bank gives a return of +33.0% over five years, Zenith Bank gives a return
of +7.8% while StanbicIBTC returns +29.1%, the second prominent laggard in the list
of the big seven banks is ETI which posted a recent five-year return of -58.1%.
Money Market
Moves
An interesting feature of
Nigeria's money market has been that its 6-month deposit rates have generally exceeded
their 12-month counterparts (see Table 2 below). The reasons for an "Inverted" deposit yield at longer tenors seem to be a lack of liquidity at the
longer end of the market. Investors prefer short-dated instruments to longer-dated
issues based on their risk aversion and the fact that they see Nigeria as a
high-inflation environment (recent inflation rate was 11.61% for Q3 2019).
Nevertheless, in the last three years (2017-2019), the spread between 6-month
deposit rates and their 12-month cousins have narrowed (-0.05% in 2017, -0.17% in 2018 and -0.04% in 2019). Between 2010 and 2019, rates for both
6-month tenor deposits and 12-month deposits have generally climbed up even
though the inflation rate over the last four years has trended downwards (see chart 1
below). The implications of rising deposit rates and falling
inflation rates are that on an inflation-adjusted basis, depositors have done
better in real terms.
Table 2 Nigeria's Average Deposit Yields Across Tenors 2009-2019
Source: Central
Bank of Nigeria (CBN), Proshare research
To Bank or
Bill?
The decision whether to
invest in domestic bank equities or to put the surplus cash in Treasury bills
has so far been an easy win for Treasury bills. Two facts are clear from
available data; The NSE bank stock index is a volatile measure of bank values
and produces returns that fail to match the domestic inflation rate, which has
hovered above +11% for most of 2019. The
banking index has risen from 17.61 in 2010 to -31.28 in
2011 and then up to 3186 in 2013 and 73.32 in 2017 before crashing to -16.09 in 2018 and -13.42
in 2019. On the other hand, Treasury bill rate has climbed from +3.85% in 2010 +13.64%
in 2012, +10.50% in 2014 and +12.34% in 2017. By 2018 the rate fell to +10.09% before climbing a notch to +10.44% in 2019 (see chart 2 below).
Returns from Treasury bills
over the last decade have, on average, provided less risky and better returns than
their banking stock alternative. Investing in bank stocks over the last two
years (2018 and 2019) have been particularly discouraging (see chart 1
below).
Chart 1 Nigeria's Banking Index and Treasury Bill Returns 2009-2019
Source: Central
Bank of Nigeria (CBN), Proshare research
Raising
Credit; the Other Side of Policy
Credit growth in Nigeria
has been slow in the last four years as the federal government's huge domestic
debt increase and double-digit coupon rates on Treasury bills (T-bills) crowded
out private sector credit expansion. Banks in the last four years have preferred
to reduce the risk of their loan portfolios by keeping idle customer balances
in treasury assets such as bills and bonds. The tight monetary policy of the
Central Bank of Nigeria (CBN) has kept returns on treasury instruments above the
domestic inflation rate, thereby protecting the real value of money market
investments. Relatively high returns on T-bills had reduced lending to the
private sector, until September 2019 when the CBN insisted that banks loans to
deposit ratios (LDRs) should not be below 60%, by October 2019 the CBN raised
the ratio even higher to 65% by the end of December 2019. The new monetary
policy would likely lift credit growth further (see chart 2 below).
Chart 2 Nigeria's Total Bank Credit Growth Q1 2015-Q3 2019
Source: Central
Bank of Nigeria (CBN)
The problem with a higher
LDR policy, however, is that banks may experience a rise in their
non-performing loans (NPLs) as risk quality would likely decline with the
increase in loanable assets outstanding on statements of financial positions of
banks (balance sheets). The average NPL ratios for Nigerian banks were +11.4% in December 2018 and +14.8% in December 2017. The ratio declined as
private sector credit started to dry up, and Nigeria's post-recession economy began
to pick up the pace. The recession between 2015 and 2016 saw NPLs rise from +4.86% in 2015 to +12.82%
in 2016 and +14.81% in 2017. The high
point of non-performing loans in Nigeria was in 2009 after the global financial
crisis between 2007 and 2008 when NPLs grew to a staggering +37.30% (see chart 3 below).
Chart 3 Nigeria Banks Non-Performing Loans 2017-2019
Source: Central Bank of Nigeria
To Save
or Invest? the New Thinking
Savings and Investments are two different animals.
While savings involve putting money aside at intervals, investment involves making
money and putting it into assets that generate more money. In a high
inflationary environment, savings are a loser's game, as inflation over time
would likely wipe out the real value of the deposits. On the reverse side,
investments should stay ahead of inflation and ensure the preservation of the
value of money assets.
In recent months Nigerians have decided that investment
in government securities is the best way to protect their money from
inflationary pressures in the short-term. Most retail buyers of government
securities have preferred the 6-month tenor, which they tend to roll over at
the end of 181 days rather than buy the 364-day bond, this seems to explain why
the longer-dated bills have lower rates than the shorter bills. The pricing of
the bills by the Debt Management Office (DMO) makes the short end of the
domestic money market yield curve more attractive.
Investing in bank stocks in recent times has not been
such a good call as the majority of banks listed on the NSE saw their stock
prices decline on a YTD basis (see Table 3 below)
Table 3 Year to Date (YTD)
Yield of Nigerian Banks Listed on The NSE in 2019
Source: Nigerian Stock Exchange, Proshare research
Of the thirteen banks listed on the NSE, only three offer a positive return year to date, and of these, only one (Access Bank Plc) offers a return ahead of the recent inflation rate of +11.61% for November 2019. Given the understanding that investors and savers want to stay ahead of inflation, the smart money in Nigeria would currently remain in a fixed deposit (FD) account that offers positive returns, preferably in double digits or places money in government T-bills. Nigerian banks may do better in 2020 if the economy expands beyond the recent GDP growth rate of 2.28% in Q3 2019 (as against the 4.5% projected by the economic recovery and growth plan (ERGP)for the whole year 2019).
Deposit rates have slowly
climbed in the domestic money market, but maximum lending rates have risen much
higher in the last three years since 2017 (see chart 4 below).
The spread between deposit and lending rates is likely to keep banks profitable
as long as the increase in loans does not also increase the value of the bank's
non-performing credits sizably.
Chart 4 Nigeria's 12-month
Deposit and Maximum Lending Rates 2009-2019
Source: Central Bank of Nigeria
(CBN)
Postscript
The investment and savings decision in Nigeria is
becoming increasingly complex as the equity market remains depressed, while the
Treasury bill market has witnessed local and foreign investor interest as the
domestic inflation rate continues to rise. The combination of lower Treasury yields and higher bond prices has led
to a keener interest in alternative investment opportunities, such as money
market, bond market and equity market mutual funds, high-risk foreign exchange
markets and equally riskier corporate commercial papers.
Investors have stayed out of equity-based mutual funds,
over the last few months, as these funds have performed as poorly as the NSE
All Shares Index which lost -15.07% year to
date. The preferred mutual funds of investors for the most of 2019 has been
Fixed-Income Mutual Funds that have provided superior net asset value (NAV)
growth, even Mixed Funds (a combination of debt and equity portfolios) have
underperformed straight fixed income mutual funds (see table 4 below).
Table 4 Fixed Income-based
(Bond) Mutual Funds NAV Returns November-December 2019
Source: Nigerian Stock Exchange (NSE)
Between November 29, 2019, and December 6, 2019, the NAV of investors in Fixed Interest Securities generally rose as distinct from the general decline in the NAV of Equity-based Mutual Funds (see table 5 below).
S
Table 5 Equity-based Mutual
Funds NAV Returns November-December 2019
Source: Nigerian Stock Exchange (NSE)
For further details, contributions and comments,
kindly send an email to research@proshareng.com
and/or content@proshareng.com
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