A few weeks ago I read an article about how lowly valued Nigerian banking stocks are. The report also claimed their P.E ratios are intrinsically low, so without trying to be a skeptic that I usually can be, I decided to look closely at these stocks. The result off course why my Buy proposition for Diamond Bank on June 11 2013. But what in this world is Skye Bank doing under my radar?
Skye Bank 2012 Audited results showed it made giant strides last year. There was an increase in Net Operating Profit of 481% to N16.5billion during the year and profit after tax also rose 872% to N12.6billion. Just like I had mentioned in my last review of the bank, much of these astronomical increased you see is mainly due to the abysmal 2011 the bank had. In 2011, Skye Bank wrote off N26.5billion in loans and added another N13.1billion in 2012. Skye Bank’s 13.1billion loan write off for 2012 was 29% of its Net Interest Income, one the highest in the industry. The bank also has a border line Capital Adequacy ratio of 17% just 200basis point above the CBN required 15%.
In fact, Skye Banks Loan Books suggest heavy exposure to the Oil and Gas Sector (N137.3billion), taking up 24% of its loan portfolio. It is also heavily exposed to General Commerce Sector and the N89.7 and Building & Construction Sectors N40.6billion respectively. Whilst the Oil and Gas sector possess inherent risk going by recent Amcon takeovers, it appears mitigated by the reforms that the industry seem to be spearheading themselves. Skye Bank’s revenue basket also offers a unique insight into how and where it makes its money from. For example, Treasury Bills and bonds contributed N19.9billion 0r 20% of Gross Interest Income indicating a reliance on the double digit interest rates offered by the CBN, FGN and some corporates. The bank also made a N5.4billion from C.O.T’s alone out of the N24billion it made on gross commissions and fees. Whilst this look good on paper and considering the Bank’s position, it was short of the prior years N5.5billion and sure to drop further as the CBN bulldozes its way into forcing banks to reduce C.O.T rates.
Despite the doomsday like reality above, this may well be a blessing in disguise for the bank. Its smaller balance sheet gives it ample space to move nimbly into the retail markets and increase its presence amongst young, modern and internet savvy Nigerians. It can also make quick decisions regarding riskier but more financial rewarding businesses particularly SME’s which may ride a boom with the emergence of the privatised power sector. Its clean up of its loans also suggest a new beginning for the bank, after all that is what Sanusi wants for his babies. But even that is not enough for me to switch to a green light. Yeah, their first quarter 2013 results seem to indicate the banks will still post a profit this year even is is showed little year on year growth.
The spark to green for me however was the book value per share of the company. It currently stands at about N8.09 and 50% more than its Market price at the close of day today of N4.6 and its P.E ratio is about 4.5x. Actually, at the current price of N4.6 and P.E of 4.5x you are actually buying a stock that is carrying a current returns of 22%. Provided it continues to make profits better than 2012’s, it will be hard to beat this offer. These are the hallmarks of a bargain for me. It’s ironic that Skye Bank’s fundamentals point to a sell in a number of metrics I use. But fundamentals take a rear seat when the stock is trading at low intrinsic values.
I will ride this risk and purchase this stock for the medium term, hoping the market will reappraise its valuation of the company. A rise to the company’s Book Value per share for me is already a 50% gain.
I instructed my Stockbrokers to purchase Skye Bank Stocks on my behalf today.