Africa’s largest privately owned investment management company, Allen Gray has expressed fear over the condition of banks in Nigeria, saying that they may be forced to raise capital before achieving normal earnings due to how so many Nigerian banks are going to go bank-erupt come 2016.
The report, which examined banks’ first quarter financial
performance as of the end of March, stated: “A few Nigerian banks may go
bust or raise capital, but luckily the share prices are discounting
this probability.”
According to Allan Gray’s report, investors’ sentiments towards Nigerian banks had gone from positive to “outright fear.” The reports reads in part as:
“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
banking industry 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 (GDP) of their respective
countries.
According to the research and investment firm, there is no reason
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 (ROE) 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
a company’s net assets expressed on the balance sheet.
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