Nigerian Banks have in the past two weeks been releasing their third quarter results and as one has come to expect, no bank posted a loss. In fact, most of the banks have reported double digit growth in both top and bottom line numbers. Despite the impressive results, bank stocks continue to face intense sell-off pressures as investors seem unimpressed. The Banking index last week fell 3.37% last week despite the flurry of earnings released last week. The banking index has now lost about 12.15% this year alone.
No Bank In the wild
The irony is fully understood when you look at the broader economy and how businesses are fairing. With the oil and gas sectors, consumer sectors and manufacturing sector reporting earnings decline it seems unrealistic that bank could be posting the kind of profits that we are seeing. The macro-economic environment in the country also suggest the economy is weak with government spending seemingly halted and GDP growth rate set to be the slowest in over 5 years.
Investors look at these factors and probably believe Nigerian banks can’t be as healthy as they claim. Most banks have reported less than 5% in Non Performing Loans (NPL’s) indicating that the huge impairments we have been seeing is not enough to cause any systemic shock. However, more circumspect investors believe things could actually be worse than claimed. They suspect a lot of loans are currently not being serviced as borrowers groan in a crash crunch that is biting really hard.
Where is the cash?
Another area of concern is the nature of results reported by most banks. A look at the make up of the income reported by most banks shows significant contribution from non traditional sources with many banks recording significant incremental revenues from commission and fees mostly made up of forex related transactions. Some of this income are not cash backed, represented mainly by paper profits. A look at the cash flow statement of some banks also help buttress this view as most of them posted a decrease in cash flow at the end of the period.
The markets also probably see a lot more regulatory headwinds coming as the impact of the TSA continue to unfold. Banks no longer have the lifeline of Government agencies who contribute significantly to cheap deposits. Sources from a regional bank indicate over N80 billion was debited from its customer deposits in one fell swoop. Retail depositors are also smarter with their money preferring to invest more than save. With fixed deposit rates competing unfavorably with treasury bills rate, depositors have little incentive to keep their money with banks for too long. Those who can’t save simply spend the money on essential items leaving banks with little room to turn the money around.
More tailwinds
Banks are still likely to face significant threat to their operations as the CBN rolls out more policies aimed at saving the value of the naira as well as stimulate growth. The current government has made it clear that it is cash strapped and is not ready to spoon feed a financial system that has for years relied on government funds. Pressure is on banks to lend to the real sector and small business and we won’t be surprised if the CBN tries to force this down the throat of banks via regulations.
Too much liquidity
Quoted Nigerian banks currently have over 340 billion outstanding shares owned by hundreds of thousands of Nigerians. The Nigerian Stock Exchange places a free float (number of outstanding shares that should be trading) of 20% for companies on its Main Board. Union Bank and Infinity Merchant bank are the only banks listed among a group of 11 companies who are yet to meet flotation requirements. This confirms how liquid bank stocks are making them a perfect target for market volatility. Despite their stability over the years and their consistency in paying dividends, some investors do not consider bank stocks as one that should be held on a long term basis preferring to take out profit whenever possible. This perceived lack of confidence makes it difficult for bank to attract the right valuation for their stock.