Coronation Asset Management has released its report on Nigerian Banks “Nigerian Banks, Resilience Built In”. The report shows that Nigerian banks’ earnings have been remarkably resilient over the interest rate cycle, their profitability is improving over time. and their stock values are remarkably cheap compared to Ghanaian and Kenyan bank stocks. The Coronation Asset Management 2021 Bank Report 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, written by Ope Ani and Guy Czartoryski of Coronation Research, examine what has happened within the Nigerian Banking industry in the last 10 years. It interrogates the investment case for Nigerian banks? 2021 is proving to be a year of volatile Naira market interest rates (rising sharply), as was 2020 (when they crashed). It is important to understand the drivers of these interest rate changes, and how the monetary authorities control liquidity and influence interest rates. It is also important to set market interest rates next to inflation.
Under these circumstances, it is understandable to be concerned about banks’ Net Interest Margins, spreads, growth and overall profitability.
According to Guy Czartoryski, ‘we look at the banks’ Net Interest Margins and spreads over the long term and find a remarkable degree of resilience through several interest rate cycles. This suggests that investors have little to fear when it comes to current fluctuations in interest rates, while the banks themselves state that they are confident they can re-price deposits and loans advantageously this year. Second, we look at the growth record of the banks and find that, with one notable exception, balance sheet growth has been elusive, something that becomes clear when we re-state key metrics for the effects of inflation over time. Third, we look at the Return on Average Equity (RoAE, or more simply RoE) and the Return on Average Assets (RoAA, or RoA) of the banks over 10 years, making note of the gradual improvement and convergence in RoAEs over this period. Finally, we look at the challenge posed by Fintech in general and by digital banks in particular.’
The report shows that 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 (PE) 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. We have bank-specific sections, and 3-year financial forecasts, and recommendations for six listed banks: Zenith Bank; Guaranty Trust Bank; Access Bank; FBN Holdings; UBA; Stanbic IBTC.
Speaking at the virtual Press Conference to unveil the report, Ope Ani, co-author of the report explained that ‘while underlying growth in assets has been elusive, especially when data are adjusted for inflation, profitability has generally improved. 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. This trend appears to be under-appreciated by investors, and the report shows the positive investment potential in the sector”
The full report is available on the Coronation Asset Management website and can be downloaded or read via this link
Coronation Research is a division of Coronation Asset Management which offers full-fledged investment services across various asset classes to the entire spectrum of investors: major institutions, smaller niche institutions & corporates, public sector family offices, cooperatives and high net-worth individuals.
The Firm’s services include fund solutions (money market fund, fixed income fund and balanced fund), portfolio management (discretionary and non-discretionary), advisory services as well as fund administration and trustee services offered through its subsidiary, Coronation Trustees Limited. In recognition of its product innovation and sound corporate governance practices, Coronation Asset Management was awarded the Fastest Growing Fund Management Company in Nigeria at the 2020 Global Banking & Finance Awards.