Investing in the Nigerian economy has been a tail of woes for a lot of local investors as the country grapples with its biggest economic challenges in decades. Corporates are declaring declining profits, jobs are being lost, loans are going bad, asset prices are tanking and the government appears confused and lost. Never has investing in Nigeria been this bad on all fronts including the banking sector where profits have declined mostly due to loans to the oil sector that have gone bad.
One Nigerian bank that has been hit the hardest is First City Monument Bank (FCMB). After issuing a profit warnings earlier in the year it reported 79% drop in earnings. It followed this with another profit drop in the first quarter of 2016. Despite these string of bad results, the bank has churned out a miraculous price recovery that has made hundreds of millions for a lot of people. In case you didn’t know FCMB’s share price crashed from as high as N2.74 a year ago to about 64 Kobo just over a month ago.
However, since it released its first quarter results last April the stock has staged a remarkable rebound that has seen it gain 140% since its year low. The stock has also gained over 50% since April 2016. So what is causing this? It’s hard to identify the main reasons but we look at a few pointers.
Fundamentals – Despite the poor string of results, FCMB share price still remained quite undervalued as it at some point traded at a price to book value of 0.1x and a P/E ratio of under 3x. This made it unbelievably attractive even for majority shareholders of the company to ignore. Just imagine you owned significant stake in this company at this prices, what would you do? Surely, it will be wise to buy more shares.
Out of the window – The bank in its latest results also confirmed that it had basically taken provisions against some of its bad oil and gas loans. This could have given investors some comfort against any further risk and an impetus to want to buy more of the shares at cheap price.
Change of model – FCMB also announced that it had changed its business model which involves them focusing more on cutting aggressive growth in exchange for growing at a risk averse pace.
As the bank CEO confirmed “We are not going to drive our corporate banking aggressively this year we are holding back to improve the quality of our book,” said Balogun, adding that the bank had tightened its risk criteria.
Smart Money – Another reason could well be that smart money has taken control of thru stock. This is quite common with Nigerian stocks recording gains in the absence of any market information. Smart money often leads to bull traps which could see gains recorded for months before the bears appear.