The Banking Sector has had a tumultuous 2014 as strict regulatory and monetary policy guidelines threaten their profitability in the months to come. Investors did not take pity on the industry as many dumped banking stocks altogether or preferred to put them in the speculative territory (riding on their high liquidity). But can this slide last forever? Or are we about to witness a huge shift? Usually, huge rally’s give us signs but not after the rally is in motion do we in retrospect start to acknowledge the signs. So, I decided to take a leap of faith and identify 8 reasons why I think the Banking stocks may just be on the start of a bullish run.
- At the end of March 2014, the Nigerian Banking Index had a year to date return of -18%. It dropped to -11% in April and as at end of May it was -1% and at the end of last week (June 6) it was -0.48%. Has the index turned the corner?
- We have a new CBN Governor who will surely bring fresh ideas and will look to take a different direction from Sanusi. One would expect a softer policy stand from Emefiele and rather than continue to rock the boat, I expect him to build bridges. One of the first being with his former colleagues.
- The CBN Governor did take out charges on deposits and promised to bring down interest rates. These might seem like another move that will affect bank bottom lines but I see it differently. A lower interest rate regime suits the need for banks to create and take advantage of better risk assets. The lesser the interest rates, the more people will want to borrow and the lesser the risk of default as well. Consumer loans, mortgage and other lucrative risk assets will open up banks to new sources of income
- The CBN Governor has promised to encourage SME Finance and promised to back it up with a stronger and efficient credit bureau. He also promised a Registry for Collateral which augurs well for banks on the long run. The safer the collateral the safer the banks.
- Banks currently have one of the lowest P.E ratios in the industry which provides a strong potential for upsides. See chart below. Compare to the likes of Oando with a P.E ratio of about 17x and Forte Oil over 50x.
- Banks* posted about N450b in profits in 2013 down from N500b in 2014. Despite drop in profits, Banks still posted an average Return on Equity of about 15%. In fact, tier 1 banks (GTB, Zenith, FBNH, UBA & Access) returned an average of about 20% at the end of 2013. Bottom line is that despite the drop in profits, banks are still posting profits and declaring dividends.
- Nigerian banks have been able to borrow at the foreign market which to me is a sign of confidence by foreign lenders. Also the MSCI Index for Nigeria has just 10 stocks. 40% of that portfolio includes Nigerian banks (UBA, GT Bank, Zenith Bank and FBNH). International investors see the opportunity.
- Finally, the big 5 banks have gained an average 20% in the last one month alone yet they are yet to cross their one year highs. As such, any talk of the price being over sold or over valued may just be shortsighted.
What do you think? Are these signs or just another meaningless statistics?
*Banks I used were Zenith, GTB, Diamond, Skye, Stanbic, ETI, Sterling, UBA, Access, FBNH, Fidelity, FCMB, Unity,Union