What is the investment case for Nigerian banks? 2021 is proving to be a year of volatile Naira market interest rates (rising sharply), as was 2020 (when they crashed). It is important to understand the drivers of these interest rate changes, and how the monetary authorities control liquidity and influence interest rates. It is also important to set market interest rates next to inflation.
Under these circumstances, it is understandable to be concerned about banks' Net Interest Margins, spreads, growth and overall profitability. In this report we look at these in the context of a 10-year study of these variables, which we present in our introduction.
First, we look at the banks' Net Interest Margins and spreads over the long term and find a remarkable degree of resilience through several interest rate cycles. This suggests that investors have little to fear when it comes to current fluctuations in interest rates, while the banks themselves state that they are confident they can re-price deposits and loans advantageously this year.
Second, we look at the growth record of the banks and find that, with one notable exception, balance sheet growth has been elusive, something that becomes clear when we re-state key metrics for the effects of inflation over time.
Third, we look at the Return on Average Equity (RoAE, or more simply RoE) and the Return on Average Assets (RoAA, or RoA) of the banks over 10 years, making note of the gradual improvement and convergence in RoAEs over this period.
Finally, we look at the challenge posed by Fintech in general and by digital banks in particular.
In terms of valuations, and despite a significant rally in share prices over the past year, Nigerian bank stocks look remarkably cheap, both in relation to other Sub-Saharan African banks and in relation to their own valuation history. Five years ago the median prospective price-to-earnings (PE) ratio was around 5.0x. Now it is 2.5x. This downward shift in ratings has exposed meaningful value for today's investors, in our view.
We have bank-specific sections, and 3-year financial forecasts, and recommendations for six listed banks: Zenith Bank; Guaranty Trust Bank; Access Bank; FBN Holdings; UBA; Stanbic IBTC.
On our BUY list we feature Zenith Bank; Guaranty Trust Bank; Access Bank; UBA; and Stanbic IBTC.
On our HOLD list we feature FBN Holdings.
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