NIGERIAN BANKS BECOME ATTRACTIVE FOR TAKEOVER DUE TO DEPRESSED VALUATION

Nigerian banks are attracting investor interest after the recent prolonged sell-off made them too cheap to ignore. The Nigerian Stock Exchange Banking Index has outperformed all sectors in the last month with its +3.9 percent gain for the period. This compares to one month returns of -3.01 percent for the industrial goods index, -8.09 for the Oil and gas index, +2.38 percent for the consumer goods index and flat returns on the broad NSE – all share index. “The equities market started the week riding on the positive sentiments… with UBA still enjoying favourable investor’ sentiments from the announced corporate action (NGN0.20/share), as the dividend yield remained attractive at 4.76 percent,” Meristem Securities analysts said in a note released on Friday. “We remain of the opinion that many of the banking sector’s stocks still hold value.” Financials led stock market activity last week, with 1.158 billion shares valued at N8.632 billion traded in 11,999 deals; and contributed 82.24 percent to the total equity market turnover volume. Nigeria, which has the continent’s largest population and economy at $545 billion (year end 2014), is attracting investor interest on banking sector valuations that are the cheapest out of the continent’s major economies including South Africa and Kenya. Four out of the five Nigerian top tier lenders are trading below tangible book value per share. FBNH trades at 0.36 x, Access Bank 0.38 x, UBA 0.44x and Zenith Bank 0.98x. Only GTB trades above book value per share, at around 2.01 xs, according to BusinessDay’s calculations. Nigeria’s largest bank by assets FBN Holding, trades at a low trailing Price to Earnings (P.E) ratio of 2.3x, when compared to South Africa’s largest bank First Rand Ltd, which trades at a P.E of 12.93. Investors are discounting banks in Africa’s largest economy, as they have to contend with the increased vulnerability of the oil and gas sector, pressure on the naira, a slower economy and tight bank liquidity via a 31 percent Cash Reserve Ratio (CRR). There is also implementation of the treasury single account (TSA), requiring all revenues due to the Federal Government of Nigeria (FGN) or any of its ministries, departments or agencies (MDAs) to be paid into the TSA or designated accounts operated and maintained at the CBN, which may weigh on future earnings. “We view the TSA implication as a structural change in banking sector funding dynamics, which has negative implications for system liquidity, funding costs and balance sheet size,” Renaissance Capital analysts, led by Adesoji Solanke, said in a recent note. Nigeria’s economic growth may slow to 2.5 percent in 2015 according to research firm, Financial Derivatives Company. That is still 100 percent higher than South Africa’s Finance Ministry’s projected growth of 1.1 percent for the year. The opportunities for Nigerian banks may outweigh the headwinds, as a large percentage of the population remains unbanked, while levers to improve profitability such as bringing down the cost to income ratios (CIR) in the sector remain un-exhausted.businessday