Bank Equity Returns Do Not Look So Good in 2019


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

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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

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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

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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


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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

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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

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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).

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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

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Source: Central Bank of Nigeria (CBN)



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.

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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

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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). 


Table 5 Equity-based Mutual Funds NAV Returns November-December 2019

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Source: Nigerian Stock Exchange (NSE)

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