Investors sceptical of banks’ growth
• Profits shrink in third quarter
• Shares selling on discount in stock market
• Shareholders task govt on business environment
With the current harsh operating environment, exacerbated by impact of COVID-19 on businesses, investors have expressed worry that the banking sector might record rise in Non-Performing Loans (NPLs) and erode profitability, if government failed to provide support to boost performance and sustain growth.
This is because banks play critical role of mobilising savings from surplus economic units to deficit areas to stimulate investments.
Investors argue that banks’ shares are currently selling on discount in the stock market, considering their book value per share, following economic turmoil occasioned by COVID-19 shutdown and other socio-political crisis.
This means that market value of banks are below the book value per share. For instance, the book value of one of the leading banks is 32.94, while market value is N22.60 kobo as of December 14, 2020.
According to analysts, the banking sector, which has been the most liquid in the Nigerian equity market over the years, has come under significant headwind in recent months.
From strict regulatory guidelines to the current systemic risk, COVID-19 and the drop in oil price have triggered a spate of sell-offs in the market, further affecting the banking sector. The pandemic has severely affected businesses; causing low patronage, dip in revenues, higher cost of operations, and crushing debts.
The situation has impacted negatively on the third quarter (Q3) result of some biggest banks, especially as several events in the country point to an uncertain 2021 for businesses.
According to data from the National Bureau of Statistics (NBS), total banking sector credit to the economy stood at about N18.8 trillion in the second quarter of 2020, up from N17.1 trillion at the end of 2019. However, NPLs at the end of the second quarter of 2020 rose by 2.27 per cent to N1.2 trillion.
Although a recent release by the NBS showed the total amount of NPLs in Nigerian banks fell from N1.21 trillion in second quarter of 2020 (Q2 2020) to N1.17 trillion as of Q3 2020; the investors maintained that increase in banks’ Loan-to-Deposit Ratio (LDR) to 65 percent last year, was to improve lending to the real sector, but has pulled a large chunk of money from the banking system.
Although, they affirmed that the market has recorded unprecedented growth in the past few months, it is argued that government’s inability to provide an enabling environment that would boost operations of companies under the real sector and improve their profits would ultimately depress the market, shore up bank’s Non-Performing Loans (NPLs), and erode their profitability.
Presently, the five big banks (FUGAZ) — FBN Holdings, United Bank for Africa (UBA), Guaranty Trust Bank (GTBank), Access Bank and Zenith Bank— are currently trading at values described by operators as very low, compared to their fundamentals.
A look at the third quarter (Q3), 2020 performance of the banks revealed that despite efforts to cope with the pandemic, profit of some Tier one banks, especially GTBank and UBA, dropped.
For the Q3 ended September 2020, United Bank for Africa’s (UBA) unaudited result showed 5.99 percent growth in gross earnings, from N428.7 billion in September 2019 to N454.4 billion in 2020.
However, its profit before tax fell from N98.2 billion to N90.4 billion, while Profit After Tax (PAT) stood at N77.1 billion; thus putting the annualised return on average equity at 16.4 percent.
The bank’s total assets grew to N7.1 trillion, a 26 percent increase from the N5.6 trillion recorded at the end of December 2019.
UBA also said shareholders’ funds grew by 9.6 percent to N655.3 billion from N598 billion recorded in December 2019, thus reflecting strong capacity for internal capital generation and growth.
Similarly, Guaranty Trust Bank Q3 result showed that the group reported a PAT of 167.4 billion, representing a decrease of 1.9 per cent over 170.7 billion recorded in the corresponding period of 2019 and an improvement on the 5.2 per cent dip posted in H1-2020, relative to H1-2019.
The bank’s loan and deposit book, however, grew by 4.5 per cent and 25.1 per cent from ₦1.502 trillion and 2.640 trillion recorded as of December 2019, to ₦1.569 trillion and ₦3.303 trillion in September 2020 respectively.
The bank’s balance sheet remained well- structured, diversified, and resilient with total assets and shareholders’ funds closing at ₦4.574 trillion and ₦755.5 billion respectively.
Zenith Bank ‘s unaudited results for the third quarter ended 30 September 2020 showed four per cent rise in gross earnings to N509 billion, from N491 billion posted in the corresponding period in 2019.
According to the unaudited account, which was presented to the Nigerian Stock Exchange (NSE), the growth was driven by non-interest income, which grew by 11 per cent to N173 billion from N157 billion recorded at the end of Q3 2019.
The Group’s Profit Before Tax (PBT) rose marginally to N177 billion at the end of Q3 2020, representing a growth of one per cent over theN176 billion posted in the corresponding period of 2019.
FBN Holdings gross earnings grew by 5.1 per cent to N439 billion from N418 billion in the previous quarter.
The bank’s PBT grew by 16.1 per cent to N63.3 billion while PAT grew by 31.9 per cent to N68.2 billion. Access Bank Plc Q3 2020 Unaudited results showed 15.4 per cent increase in gross earnings to N593 billion from N514 billion achieved in 2019. PBT grew by 15.7 per cent to N117 billion, while PAT grew by 15.7 per cent to N102 billion.
Reacting to the performance, the Chief Research Officer of Investdata Consulting Limited, Ambrose Omordion, said the banking sector’s Q3 numbers were mixed and flat.
He argued that, aside GTBank that seemed to be selling at premium price, the banks were underpriced and currently selling at a discount in the stock market.
However, he pointed out that some scorecards were outstanding to give insight of dividend possibility.
“The tier one banks have the earnings capacity to pay investors dividend at the end of the current financial year-end. These banks are underpriced, except for GTBank that seems to be selling at a premium, while others are selling at a discount with high margin of safety, considering their book value.
“But the sector looks good and attractive for income investors and traders. They should keep their gaze on banks with earnings capacity to pay dividend.
The future of Nigerian banks are stable. The sector has shown resilience during the pandemic. The improving macro-economic indices indicate that business environment is becoming stable. This is expected to support the banks,” he said.
A stockbroker with APT Securities, Jamiu Kayode, said: “All the tier one banks have improved when you compare Q3 2020 to that of 2019, except GTBank and UBA whose profit dropped from N146 billion to N142 billion and N81 billion to N77 billion.”
Although he said the share prices had increased significantly, he, however, noted that the stocks were still undervalued.An independent investor, Amaechi Egbo, said the 65 per cent LDR of banks and low interest rates had supported economic recovery, despite the economic recession.
He stated that government must continue to create the enabling environment for companies to thrive so that loan facilities from banks would be properly utilised.
According to him, if government will remain focused, in addition to good regulations and improved business environment, the issue of rising NPLs would be checked in the banking sector, while banks would continue to expand operations and increase profitability.