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4 banking stocks that still appear ‘cheap’

Nairametrics by Nairametrics
June 19, 2017
in Markets, Stock Market
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The Nigerian Stock Exchange is currently riding on its longest bullish run in over a decade. The All Share Index is already 25% up this year and it appears there are limited room for some upside. One sector that has garnered significant attention from the point of view of investors is the banking sector.

The Banking Index is currently 51% up year to date with nearly all the gains coming this second quarter alone. Banking sectors typically attract the blessing of the bulls during bullish sentiments and the wrath of bears when investor sentiments are bearish. Their volume and visibility makes them an easy target. But are banking stocks now over valued? Are there still potential upsides?

One way to determine whether stocks are overvalued or undervalued is to look at the price earnings ratio. Despite the 51% gain this year, major banking stocks have an average price to earnings ratio of about 6x making them still attractive based on price multiples. The wider index also currently trades at a price earnings ratio of 15x. If 6x is the average P/E ratio for banking stocks, then stocks that trade below this figure can be said to be cheap relative to their peers. There are currently 5 banking stocks that make this cut and we will focus on 4 of them.

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Fidelity Bank – this stock currently trades at an earnings multiple of 3.6x making it the cheapest banking stock out there. The bank reported a profit decline in 2016 but things appear to be turning around. Its profits are up 20% in the first quarter of this year. This is a stock that should at least trade at 4.5x its last year’s earnings which suggest a valuation of N1.66. That is a 20% upside on the N1.33 it closed with on Friday.

Access Bank – This was one of the most undervalued stock on the NSE which is no surprise that its share price has returned about 70% since the rally began two months ago. Despite this remarkable return, Access Bank is trading at just 3.7x its earnings. Access Bank posted a modest 8% growth in profit last year but reported a Q1 profitability growth of about 33%. Is there still room for an upside? If we are to base our judgment on price earnings ratio, then one can get away with an earnings multiple of 5x for this stock. If this were to be the case then Access Bank could still trade slightly above N13.5 giving it a 35% upside on the current price of N10.

UBA – This is another bank that has returned 92% this year alone. At N8.68 the stock is trading at a price to earnings multiple of 4x. Just like Access, we believe the share price should trade in the region of 5x earnings which will take its share price to just above N10. UBA also reported a 31% growth in the first quarter of 2017 and if it sustains that growth at the end of Q2 then it could be poised for another rally. A N10 share price has an upside of about 20% to current price.

Zenith Bank – This stock has also performed relatively well this year gaining 55% this year alone. However, compared to GTB, the stock is cheap using price earnings multiple. While GTB attracts a multiple of 7X, Zenith is stuck at 5x multiple. Zenith is typically one multiple below GTB so we see it trading at 6x soon. This will take share price to N26.8 giving it a 17% upside on its Friday share price of N22.89.

Is this achievable?

Going by the way the market is surging there is still quite some room for banking stocks. They have taken a beating in recent months beating down their valuations to under 2x earnings. Some are still trading at par or just above their book values. However, there are some downside risks. Banks have been helped largely by forex gains without each the high non-performing loans they carry might have ravaged their earnings. This is why some of the banks have opted to raise quasi equity instead of an outright equity sale. Zenith and UBA have just concluded a successful Eurobond sale. If Access goes ahead to raise equity via a rights issue like it planned a year ago, then its share price might fall.

 

Tags: Financial Services
Nairametrics

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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