• Over 65% of stocks undervalued
• Banks trade at a discount
• Operators blame capital flight, task govt on patronage
Nigeria’s investment climate, especially that of the stock market, is taking a hit as investors show apathy towards banking stocks despite a strong combined profit in excess of N260 billion by 11 banks listed on the Nigerian Stock Exchange (NSE).
The banks made up of five Tier-one banks and six others are currently trading at value described by operators as very low compared to their fundamentals and appreciable profits posted in Q1, 2020.
It was gathered that prices of these stocks have fallen below fair value as the N260 billion profit in Q1, 2020 was not enough to woo investors and stimulate activities on the sector.
Already, the development is impacting negatively on the market; given that the banking sector constitutes more than 70 per cent of the overall market performance.
As in the first quarter of 2018, the banking sector was already on a positive trend due to high demand for the stocks in the previous year.
In 2019 when the results of the banks hit the market, with N 256 billion first-quarter Q1 results, which was lower than the 2020 performance, banking stocks, driven by the tier-one banks, offered good returns to investors in the equities market.
Now, it is a different scenario when compared to the current performance where the sector is still trading on a negative territory in the second quarter.
A look at the sector showed that over 65 per cent of the listed banking stocks are undervalued as most of the shares currently trade at a discount to their book value, meaning their price to book value is below one.
Surprisingly, these banks deliver double-digit Return on Equity (ROE) and consistently pay a dividend with yields most times in double-digit, yet most of the banking stocks trade at discounts to their fair value.
For instance, the Tier-one banks’ Earning Per Share (EPS) during the period showed that Access, FBNH, GTB, UBA and Zenith posted N1.21 64kobo, N1.78, 83kobo and N1.61, against the fair value of N13, N9, N45, N15 and N35.
Operators have linked the poor valuation of these stocks to poor demand induced by the exit of foreign investors, weak economic growth and stifling effect of the macro-economic headwinds.
According to them, given that the nation’s market has been driven and dominated by foreign investors (Foreign Portfolio Investors and Foreign Direct Investment) and in recent times there is no significant interest from these set of participants, the demand for most banking stocks have reduced, and this has left the stocks trading at discounts to their intrinsic value.
They categorically stated that the poor valuation was not as a result of COVID- 19 crisis, insisting that most blue chips have been undervalued even before the pandemic.
They pointed out that if government failed to create appropriate fiscal policies and incentives needed to attract local patronage, drive domestic economy and generate more wealth for sustainable market rebound, the banking sector might not withstand the current poor state of the economy.
The operators hinged their position on claims that the commercial sector and other key segments of the economy are currently performing poorly. They said the government must focus more on initiatives that will restore local investors’ confidence and break the hold of foreigners to avert another round of crisis in the nation’s capital market that could lead to the loss of investments.
A breakdown of the performance of some of the banking stocks showed that Zenith Bank, which is currently trading at N16.15 kobo as at yesterday, June 22, 2020, took the first position with N50.5 billion Q1 profit while GTB took the second place with N50.1 billion trading at N22.75 kobo. Access Bank ranked third with a profit and stock price of N40.9 billion and N6.75 kobo per share.
Furthermore, UBA, trading at N6.35 kobo, made N30.1 billion as profit after tax. FBN Holdings rounded up the top five with a profit of N25.7 billion and trading value of N5.25 kobo for the Q1, 2020.
According to the Nigerian Stock Exchange (NSE) Domestic and Foreign Portfolio Report, foreign investors pulled a total of N642.65bn from the nation’s stock market in 2018, while foreign outflows from the country were as high as N523.42 billion in 2019, compared to an inflow of only N419.13 billion.
In his reaction to the development, a professor of Capital Market and Head of Banking and Finance Department at the Nasarawa State University, Keffi, Uche Uwaleke said the undervalued state of banking stocks is a reflection of investors’ sentiments on the sector.
He pointed out that the high Cash Reserve Ratio (CRR), which is a constraint on banks’ liquidity, in addition to the CBN sanctions on defaulting banks in recent times could possibly have been erroneously interpreted by some investors as a sign that all is not well with the banking sector.
“The Banking sector is very volatile not least because the industry is highly affected by external shocks. If the market values of banking stocks are generally thought to be below their fundamentals, implying undervaluation, it is simply a reflection of investors’ sentiments.
“This should not come as a surprise given that many deposit money banks are significantly exposed to the oil sector. Another factor could be the impact of tight monetary policy on the financial performance of banks. “The high CRR which is a constraint on banks’ liquidity and the CBN sanctions on defaulting banks in recent times could possibly have been erroneously interpreted by some investors as a sign that all is not well with the sector making them develop cold feet towards banking stocks.”
The Head of Research, FSL Securities, Victor Chiazor said fears around Nigeria’ s economic direction had weakened bullish sentiments.
“Over the years the Nigerian equities market has not recorded the expected rise in public interest with regards to investing and trading inequities.
“Since the financial crisis of 2008, almost all sectors of the equities market have remained undervalued with exception to a few listed stocks that are trading at a premium to their fair value.
“Given that our market has been driven and dominated by foreign investors: Foreign Portfolio Investors and Foreign Direct Investment) and in recent times we have not seen significant interest from these set of participants, this has reduced the demand for most of the companies listed on the Nigerian stock exchange and this has left most of these companies trading at discounts to their intrinsic value.’’
In a bid to move prices up, the bid position must be strong enough and consistent over a period to drive prices to elevated levels, else prices will remain low once investors continue to avoid investment in shares.
He insisted that domestic participation is vital to the growth of the market. According to him, government at all levels; in collaboration with the market, operators must find ways to increase domestic participation and reduce over-dependence on foreign investments to drive the nation’s equities market.
A stockbroker with APT Securities Limited, Muhammad Jamiu Kayode, said despite the better performance of the banking sector in the first quarter of 2020 compared to that of 2019, the shares were seriously battered.
He said: “They came to this present level because of the way trading activities in the stock exchange are. Before now foreign investors used to have 54 per cent trading activities while domestic investors have around 46 per cent trading activities.
“This makes our market exposed to exchange rate fluctuations because whenever there is a threat to exchange rate liquidity, foreign investors will start selling off their holdings so as not to devalue the currency.
“That is why you see that equity market is strongly correlated positively with global oil price. The experience in equity market is still fresh in our memory over the global supply glut in the month of March and April 2020.’’
He urged domestic investors to boost their trading activities and increase their holdings in the stock market to reduce the dominance of foreign investors in the market.
Former Secretary-General of Independence Shareholders Association, Adebayo Adeleke said the impressive full-year results of the banks could not reflect on their share price as weak demand continued to threaten the stock performance.
According to him, the nation’s economy had been grappling with weak recovery since the 2014 oil price shock and 2016 economic recession.
He pointed out that with predictions of imminent recession this year, local investors have adopted cautious trading, while foreign investors have offloaded their holdings, leaving the market in a depressed mood.
He said the equities market had remained the most attractive investment to foreign investors, insisting that over-dependence on foreign investors in the market could cause another crisis in the near future.
“There is need to pursue measures that would make the market more attractive to retail investors, not over-dependence on foreign investors and FDI because when other foreign markets are troubled, it would have a ripple effect on our market and cripple activities. We should grow our own local market.”