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‘Nigerian banks’ earnings resilient over interest rate cycle’

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A new report by Coronation Asset Management on Nigerian Banks titled ‘Nigerian Banks, Resilience Built In’ has shown that Nigerian banks’ earnings have been remarkably resilient over the interest rate cycle, even as their profitability has also improved over time.

A breakdown of the report showed that the total average interest-earning assets of the six banks rose from N6.5 trillion in 2010 to N26.9 trillion in 2020, or by 311 per cent, while the total gross loans of the banks rose from N3.9 trillion in 2010 to N13.6 trillion in 2020, or by 248 per cent.

The positive outliers for growth are Access Bank (growing quickly even before its 2019 merger with Diamond Bank), UBA and Zenith Bank.’

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The report also showed that the stock values of these banks are remarkably cheap compared to Ghanaian and Kenyan bank stocks.

It said: “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 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.”

The report, which was written by Ope Ani and Guy Czartoryski of Coronation Research, examined what has happened within the Nigerian Banking industry in the last 10 years.

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“It is a unique 10-year study of the margins and profitability of six listed banks: Zenith Bank; GT Bank; Access Bank; FBN Holdings; UBA, and Stanbic IBTC. These banks have adapted successfully to many changes in interest rates over the 10 years from 2010 to 2020. Therefore, they are well-positioned for the rise in rates in 2021.”

The report also stated that while underlying growth in assets has been elusive, especially when data are adjusted for inflation, profitability has generally improved.

It stated that the return on average equity (RoAE) and return on average assets (RoAA) of the six banks studied have both converged and improved over 10 years.

According to the report, the trend appears to be under-appreciated by investors, even as the report showed the positive investment potential in the sector.”

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