A new report by Allan Gray Group has stated that a few Nigeria banks
may go bust or raise capital next year.
The report, which examined the lenders' performance as of the end of
March, added that investors' sentiment towards Nigerian banks had gone
from positive to 'outright fear.'
The research by Allan Gray, Africa's largest privately-owned
investment management company, linked the development to the falling
oil price, likely spike in bad debts, political uncertainty and the
Boko Haram insurgency.
The report read in part, "Sentiment towards Nigerian banks has gone
from positive to outright fear. The fear is not without reason given
the falling oil price, likely spike in bad debts, political
uncertainty and Boko Haram insurgency.
"It is indeed likely that there will be a lot of distress in the next
year, but it is important to remember that what a company earns in a
particular year generally has little bearing on the intrinsic value of
the business; what counts is the level of normal earning through the
cycle and the ability to grow those earnings.
"Financial companies are a little different in this regard as they may
go bankrupt before achieving normal earnings. A few Nigerian banks may
go bust or raise capital, but luckily the share prices are discounting
this probability."
The Allan Gray report, entitled 'Gray Issue: The sentiment pendulum',
also compared Nigerian banks with Kenyan banks relative to their
assets and the Gross Domestic Product of their respective countries.
According to the research and investment firm, there is no reason why
the Kenya banking sector should be any more or less profitable than
the Nigerian in the long term, arguing that over the past 10 years the
Return on Equity for the two sectors have been similar.
The ROE measures a company's profitability by revealing how much
profit a company generates with the money shareholders have invested.
The study read, "With a similar ROE, the Price-to-Book value for these
two countries' banks should be fairly close. However, the largest five
listed banks in Kenya are trading at 2.6 times book value, discounting
a long-term ROE of about 26 per cent, while the Nigerian banks trade
below book value, indicating a long-term ROE of around 10 per cent.
"The market capitalisation of the companies relative to the assets on
the balance sheet tells a similar story, with Kenya banks pricing in a
return on assets 3.5 times that of Nigerian banks.
"In the Allan Gray Africa ex-SA Equity Fund we have a significant
investment in Nigerian banks and very little in Kenya banks. We think
the terrible sentiment and clear risks are giving us the opportunity
to buy decent businesses, with favourable long-term prospects, at very
attractive prices."
The Price-to-book value is a financial ratio used to compare a
company's current market share price to its book value i.e the value
of the of a company's net assets expressed on the balance sheet.
Industry players and analysts had said a number of regulatory measures
aimed at stabilising the economy would make it difficult for banks to
make higher profit this year.
The Managing Director, Afrinvest West Africa Limited, an investment
advisory firm, Mr. Ike Chioke, had said the reduction in banks' fee
income would make the year turbulent for the financial institutions.
He said, "It is going to be very challenging for the banking sector
this year. You remember a gradual progression of the CBN trying to
reduce the fee element that the banks do enjoy. The Commission on
Turnover for example has been reduced from N5 to N3 and N1 per mille.
By 2016, it will be reduced to zero.
"The CBN has also come up with a lot of measures to control the
foreign exchange. All of these are taking away the fee incomes that
the banks would ordinarily have enjoyed. So, I see that some banks
will be in a place where their cost structure may be too difficult for
the income generated to carry. So, they will have to find new ways to
generate additional income.
"But trying to find new ways to generate additional income in an
environment where there is declining revenue overall for the federal,
state and local governments is going to be very difficult. It is going
to be a depressed year for the banks."
The Managing Director, Asset Management Corporation of Nigeria, Mr.
Mustafa Chike-Obi, recently said falling oil prices would cause
"serious economic headwind" this year and banks would be forced to
record very significant increase in non-performing loans.
--PUNCH
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