The recent rally witnessed in the Nigerian stock market has been driven mostly by increased liquidity from market activities of local investors amidst depressed yields in the fixed income space.
In an interview with Lilian Olubi, Chief Executive Officer, EFG Hermes Nigeria, she shared her views on the investment climate in Nigeria, the 2021 budget, and treasury bills yields, amongst others.
What growth trajectory do you predict for the Nigerian economy in 2021 after falling into recession?
We anticipate GDP growth to bounce to c.3.5% largely driven by the lower base in 2020, where we expect the economy to shrink by more than 4%. This should not be seen as a strong recovery but should be seen within the context of a bounce back from a sharp contraction. In our view, growth on a normalized trend is 1 to 2%.
Despite the disruption triggered by the COVID-19 pandemic, Agriculture, ICT and Financial Services sectors have remained resilient. What do you think is responsible for this and which sectors do you see driving growth in 2021?
Agriculture, globally and not only in Nigeria, has been quite immune from the impact of the pandemic, since cases have been generally low in rural areas and a lot of agricultural activities were not subject to restrictive measures.
Moreover, farmers needed to keep harvesting to supply the market with food products, for which demand did not drop during the lockdowns (if anything increased). The same goes for telecommunications, with significant uptick in data consumption as more people stayed at home due to the lockdown period.
Going into 2021, we think sectors like construction, trade, transportation, and manufacturing will lead the normalization trend, having been amongst the hardest hit this year.
The Federal Government has presented a budget estimate of 13 trillion with a historic deficit of N5 trillion. How realistic do you see the 2021 budget in line with the assumptions?
The budget assumptions appear quite realistic this year, especially with respect to oil prices and production. We are relatively more optimistic about the price trajectory though, leading us to expect marginally lower deficit than the government expects.
As an investment banking organization, on a year-on-year basis, what is your assessment of the investment climate in Nigeria on the back of COVID-19 and oil price disruptions?
The COVID and oil price shocks have hit the availability of foreign exchange in the market and this has had quite a negative impact on the country’s investment climate. COVID has not been as bad as it is in developed countries, but FX shortages have made business in Nigeria difficult, especially for portfolio investors who cannot get their money out of the country very easily.
Small businesses have also resorted to the parallel market to source FX at a significant premium to the official rate, resulting in rising inflation at a time when inflation globally is depressed with contracting demand and falling commodity prices.
The 3 months, 6 months, and 9 months treasury bills true yield traded at 0.0689%, -0.0369%, and -0.0920% respectively. This suggests investors are now willing to pay the government to keep their money for them. Do you see a possible summersault in this trend, and will there be major selloffs anytime soon on the equity market?
The freefall in yields witnessed over the past 12 months has been mostly driven by maturing OMOs that were recycled into Treasuries. With not much maturities remaining over the coming months, we think downward pressure on yields will recede and we could see a slight and limited bounce back next year. However, rates are likely to remain low given CBN’s easing stance and the bank’s willingness to drive credit growth.
What will be the outlook for the Nigerian fixed income market in 2021 in terms of the regulatory landscape and opportunities for investors?
With the above-stated view on the rate trend, we believe it portends a challenging situation for foreign portfolio investors, who in addition to the low yields are also dealing with FX shortages. For local investors, while the concern for negative real returns is apparent, it remains a market where they still have to hold most of their liquidity and this will continue as they anticipate new developments that would either boost the fixed income market while making some shift to equities and other asset classes.
In November (MTD), the Nigerian equity market was on a rally that triggered a circuit breaker on the NSE on Thursday 12th, what does this mean for the market’s outlook?
The rally has been mostly driven by increased liquidity from local investors choosing to invest in the market amidst depressed yields in the fixed income space. With much less liquidity increase anticipated in the coming months, we do not think that the rally will be sustained beyond the next couple of months. A sustained market rally would need more structural reforms, including adjustment to the FX market, fiscal reforms, and stabilizing inflation.
The official exchange rate has been adjusted by c.20% in 2020, do you see a further adjustment in 2021 and what should investors look out for?
Pressure for further adjustments still exist, but with the recent oil price recovery and prospects for more; we think it is more likely that FX rates would not see much change in 2021. The main risk remains a backtrack for oil prices for any reason.
From an investment perspective, what investment options would you advise investors (retail and institutions) to focus on in 2021?
We consider equities as the place to be amidst depressed fixed-income yields. Banks, for instance, have good chances to continue providing decent dividend yields, thereby compensating investors for the low-yield environment.
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Is something fishy going on at Custodian Plc?
Custodian stock hit a year high just as it announced a Convertible Loan Instrument set to be approved at its AGM.
Custodian Plc, one of the largest insurance companies in Nigeria is currently trading at a new year high of N7.10 and is up 21% year to date. Nairametrics Blurb team has in recent days noticed an upsurge in its share price especially since the company announced its AGM.
As we pen this article, about 2.9 million units have exchanged hand at a share price of N7.
The stock is included in the Pension Index and by some measure quite illiquid. It is also one of the stocks recommended in our Premium Service Stock Select Newsletter thus the need for further introspection.
Custodian Investment AGM
Typically, when companies announce AGMs we are keenly curious as this is where decisions that can ultimately affect shareholders (especially smaller retail investors) are approved.
In its recent filings, the company stated as follows in item 10.
That the Board of Directors of the Company be and is hereby authorised to:
(a) raise the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars), as additional capital through a convertible loan instrument;
(b) convert the loan in the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars) into shares in the Company (the “Conversion Shares”) at a conversion price, being the higher of N6 per share or the 12-month historical average daily share price of the Company derived from the Daily Official List of The Nigerian Stock Exchange (for the period ending on March 23, 2021), subject to adjustment upon the occurrence of certain adjustment events;
(c) allot the Converted Shares to the Lender upon the exercise by the Lender of its right to convert the Loan into shares in the Company, subject to applicable law; and
(d) take steps necessary or reasonably desirable to give effect to the foregoing resolutions and for effecting any transactions pursuant thereto, including the appointment of professional advisers, and the obtention of relevant regulatory approvals.
What this means?
In simple English, the directors of Custodian are seeking the approval of its shareholders to borrow $15 million (N6.1 billion) in convertible loan instrument.
A convertible loan instrument is simply a loan that you can convert into shares if the lender so wishes. The share price for conversion are predetermined and in this case, they stated N6 per share or the 12-month historical average daily share price of the company’s stock.
If the lender does decide to convert the loans to shares at the current share price of N6 per share, it means about 1 billion shares will be offered to the lender, an equivalent of 17.4% of the total outstanding shares of the company. This loan is in effect, a potential dilution of existing shareholders of the company if it is approved at the AGM.
So why is the company seeking a convertible loan or even diluting its shareholders?
Fishing around for why
Typically when a company decides to raise money via a convertible loan instrument, they are looking for lower interest rates, debt that avoids the burden of periodic repayment, and/or looking to delay when the actual equity is issued. There are also tax considerations at play but not as significant as the ones mentioned above.
Except, Custodian is looking to purchase another asset, after it bought UPDC, we do not understand why it will be looking to raise capital huge enough to dilute existing shareholders. It also did not explain why it is seeking to raise the said capital in its AGM Notice, a slight departure from the norm in cases like this.
- Custodian is also highly capitalized with a Net Asset of about N46 billion and a balance sheet size of N176.1 billion (after the acquisition of UPDC) as of 2020.
- Suffice to add that the company recently paid shareholders about N2.6 billion in dividends, making us wonder why it is seeking to dilute shareholders when it could have just ploughed that amount to its capital raising needs.
- In fact, the dividends paid in 2020 was just 21% of profits, meaning it had retained about N10 billion in profits made during the year. Again, why does it need N6.1 billion in loans?
- Custodian also has a thriving insurance business which fetched it about N58 billion in gross premium income out of which N32 billion was from non-life. Again, why does it need N6.1 billion on convertible loans?
- The company currently carries a debt of about N5.5 billion which was inherited from its acquisition of UPDC. The debt is mostly a bond issued at an interest rate of 16% per annum and due for full liquidation in 2023.
- There is no rush to pay down this debt.
We are lost as to why the company is looking to raise this capital and can only now think of two reasons. Firstly, could it be the existing shareholders looking to tighten their stake in the company? Custodian’s majority shareholders are Gratitude Capital Limited and Mikeade Investments Limited with 22.48% and 15.72% respectively.
- The company CEO Oluwole Oshin represents Gratitude Capital while Business Mogul Micheal Ade (Elizade) owns Mikeade Investments Limited. Could it be either of these two investors looking to up their stakes?
- There could also be a reason for this back door approach. About 74.5% of the company is owned by just 20 shareholders so it is clear that increasing majority stake will be difficult to achieve.
- The other reason is perhaps an institutional investor looking to acquire a significant stake in the company through the backdoor. Is this plausible?
Well, these are speculations that only Cusdotian can confirm. We hope they do so as soon as possible.
EXCLUSIVE: Best performing banks in Nigeria judging by the numbers
Nairametrics analysed the best banks in Nigeria based on their performance in 2020.
The year 2020 was a remarkable year for the Nigerian banking industry as different policies such as the GSI policy, loan restructuring, etc., were issued in the industry’s favour. The industry became more competitive in the year, with each of the banks striving to increase its market size and revenue.
Tracking the public information of listed banks on the NSE, we analysed them based on popular metrics to determine the leading players in the industry. For the analysis, the full year 2020 results of the following banks were tracked: Access, FBN, FCMB, Fidelity, GTB, Jaiz, Stanbic IBTC, Sterling, Union, UBA, Wema, and Zenith Bank. Ecobank was not considered in the analysis as the bank operates efficiently in other markets besides Nigeria.
The key metrics considered in these analyses are Total Assets, Net Assets, Total Deposits, Profit After Tax, Return on Equity, and Return on Total Assets.
Leading Banks by Total Assets
An analysis of the combined assets of the 12 listed banks that have released their full-year (2020) results (Ecobank excluded) showed that the total assets increased by 27.9% from N38.7 trillion to N49.4 trillion. The increase indicates the stronger financial position of the banks.
Among the 12 banks listed in Nairametrics tracker, the following are the leading banks.
First position – Access Bank: N8.7 trillion
Second position – Zenith Bank: N8.5 trillion
Third position – UBA: N7.7 trillion
Fourth position – FBN Holdings: N7.7 trillion
Fifth Position – GTB: N4.9 trillion
Upshots – Access Bank and Zenith Bank maintained their positions as the banks with the highest total asset in 2020. UBA however, overlooked FBN to stand in the third position, while FBN declined to fourth on the list. Among the leading banks (FUGAZ), UBA had the highest year-on-year growth of 36.95% in 2020, while in the industry generally, Jaiz bank had the highest growth in total assets of 39.3%.
The net asset represents the remainder when all liabilities have been subtracted from the bank’s total asset. It indicates the shareholders’ funds in the banks. Due to the depository nature of commercial banks and the ability of banks to greatly increase their liabilities, the metric is adopted by the CBN in assessing the banking sector’s ability to withstand credit losses.
The combined net asset of our 12 analysed banks increased by 17.9% in 2020 with the largest growth of 25.3% coming from Stanbic IBTC.
The leading banks based on net assets are:
First Position – Zenith Bank: N1.1 trillion
Second Position – Guaranty Trust Bank: N814.4 billion
Third Position – FBN Holdings: N765.2 billion
Fourth Position – Access Bank: N751.0 billion
Fifth Position – UBA: N724.1 billion
Upshots: It is observed that all the banks had significant increases in their net asset in 2020 while the top ones also maintained their positions. However, Union Bank and Wema Bank recorded the least growth in net assets with a 4.75% and 5.9% increase respectively. Zenith Bank’s net asset grew by 18.6%, Guaranty Trust Bank by 18.5%, FBNH by 15.7%, Access bank by 23.8%, and UBA by 21.1%.
Customer deposits remain one of the most competitive items in the banking sector since it is from deposits that loans are issued out and other investments are made.
The total customer deposits of the tracked banks increased by 32.1% in 2020. The bank with the highest growth in customer deposits during the period was UBA growing by 48.1%, from N3.8 trillion at the end of 2019 to N5.7 trillion as of April 31st, 2021.
The leading banks based on Customer Deposits are:
First Position – UBA: N5.7 trillion
Second Position – Access Bank: N5.6 trillion
Third Position – Zenith Bank: N5.3 trillion
Fourth Position – FBN Holdings: N4.9 trillion
Fifth Position – GTB: N3.5 trillion
Upshots: UBA grew significantly in 2020, moving from fourth place in 2019 to the bank with the highest customer deposits at the end of 2020. Generally, all the banks recorded customer deposits growth higher than 20% in 2020 with the exemption of Jaiz bank and sterling bank which grew by 7.2% and 6.5% respectively.
Profits After Tax
Due to the increased capacity seen in the growth of total assets of the banks, the banks under our radar delivered improved PAT except for Fidelity, and Wema Bank.
Banks that declared the most profits are;
First Position – Zenith Bank: N230.6 billion
Second Position – Guaranty Trust Bank: N201.4 billion
Third Position – UBA: N113.7 billion
Fourth Position – Access bank: N106 billion
Fifth Position – Stanbic IBTC: N83.2 billion
Upshots: Zenith Bank and GTB outperformed their peers as done in previous years. Also, UBA again outgrew its 4th position in 2019 moving up the ladder to the third position at the end of 2020. However, in terms of growth in PAT, UBA also grew highest by 27.7% in the period under review.
Return on Equity
The return on equity is an important metric that shows the percentage of profit made on every N1 of the shareholders’ fund. It is used to measure the performance and efficiency of the banks.
This metric will show how well banks have maximised the increase in shareholders’ wealth they enjoyed in 2020.
The leading banks based on ROE are
First Position – Guaranty Trust Bank: 26.8%
Second Position – Stanbic IBTC Holdings: 24.4%
Third Position – Zenith Bank: N22.4%
Fourth Position – Jaiz Bank: N17.4%
Fifth Position – UBA: 17.21%
Upshots- Sequel to the increase in total assets and PAT of GTB, the bank was able to achieve the greatest efficiency in the industry delivering a return rate of 26.8% to its shareholders.
Return on Assets
This metric measures the ability of a bank to sweat its assets and deliver the highest possible profits. In the earlier section of the report, we stated that banks recorded significant increase in their assets, however, the ROA was lower. The ROA is a better measure of efficiency since it takes into cognition the bank’s usage of customer’s deposits.
Best banks based on ROA are:
First Position – Guaranty Trust Bank: 4.6%
Second Position – Stanbic IBTC Holdings: 3.8%
Third Position – Zenith Bank: 3.1%
Fourth Position – UBA: 1.7%
Fifth Position – Jaiz Bank: 1.5%
Upshots: A similar result is seen in ROA just as seen in ROE. The average industry ROA was 2.05% and Access (1.3%), FBN (1.1%), FCMB (1.1%), Fidelity Bank (1.2%), Sterling bank (0.9%), Union bank (1.2%) and Wema bank (0.6%) all performed below the industry average.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- Cornerstone Insurance Plc notifies stakeholders of late submission of financial statements.
- NSE approves delisting of 11 Plc shares.
- Berger Paints Nigeria Plc reports a 67% decline in Profits in FY 2020.
- MTN Nigeria raises N73.5 billion from CP Issuance to finance operations.
- Jaiz Bank proposes dividend worth N884 million for shareholders.