The banking stocks within the SWOOT group are perceived as relatively undervalued when compared to other sector stocks within the SWOOTs.
The lower P/E ratios and higher earnings yields of Zenith Bank, GTCO, FBNH, and UBA indicate this state of undervaluation and potential investment opportunities.
As of the close of trading on Friday, January 12, 2024, SWOOTs, colloquially referred to as Stocks with a market capitalization of over one trillion Naira comprised of eleven companies.
Airtel Africa led with a market capitalization of N7.516 trillion, followed by Dangote Cement (N5.964 trillion), MTN Nigeria (N5.374 trillion), BUA Foods (N3.481 trillion), BUA Cement, (N3.285 trillion), GTCO (N1.191 trillion), Seplat (N1.359 trillion), Zenith (N1.350 trillion), UBA (N1.060 trillion), Transcorp Hotel (N1.024 trillion), and FBNH (N1.005 trillion).
In terms of share price movement, the SWOOTs companies have shown resilience. The share price movements in 2023 paint a dynamic picture of the Nigerian stock market.
The banking sector’s remarkable surge, led by UBA’s exceptional 238% YtD gain, reflects a positive market sentiment towards financial institutions.
Transcorp Hotel’s unprecedented 1,023% YtD gain signals potential opportunities in the hospitality sector, while the diverse outcomes in the Telecom, cement and food industries underscore the importance of sector-specific analysis.
This year, the share price gain trend has continued, with the average Year-to-Date gain of SWOOTs standing at 14%. This surpasses the broader market gain of 11.06%, indicating the resilience and strength of these high-capitalization stocks.
The banking sector has exhibited impressive performance, emerging as the standout winner. The migration of four banking sector stocks into the SWOOT cadre signals significant growth and stability within the industry.
This marks a noteworthy shift, particularly considering that none of the banking sector companies had a market capitalization of one trillion Naira when the market closed in 2022.
The elevation of these banking stocks to the SWOOT status underscores their substantial expansion and financial strength, reflecting a positive trajectory for the sector.
The financial performance of the banking sector in the first nine months of 2023, coupled with the expectation of continued profits, has played a pivotal role in influencing the sector’s share price movements.
During the initial three quarters of 2023, three out of the four banking SWOOT companies outperformed their counterparts in other sectors in terms of Profit After Tax (PAT).
UBA led with an impressive N449.296 billion in PAT, closely followed by Zenith Bank with N434.172 billion. GTCO secured the third position with a notable PAT of N367.417 billion.
However, the question that lingers is whether the banking sector’s profitability growth in the first nine months of 2023 and anticipated profitability in the last quarter, driven by foreign exchange losses, has indeed impacted investor sentiment
Nevertheless, the bottom line boils down to the question of at what value are you buying?
The goal is to profit by investing in seemingly undervalued stocks, expecting substantial returns as the stock price aligns with its intrinsic value, reflecting the actual fundamentals.
Undervaluation Perspective:
The banking SWOOTs, including UBA, Zenith Bank, GTCO, and FBNH, exhibit notably low P/E ratios of 2.14x, 2.79x, 3.50x, and 3.60x, respectively.
When compared to other sector SWOOTs such as Airtel Africa (30.30x), Dangote Cement (13.49x), MTN (26.18x), BUA Foods (31.95x), Bua Cement (33.50x), Seplat Energy (62.43x), and Transcorp Hotel (228.94x), these figures suggest a potential undervaluation of the banking SWOOTs.
A lower P/E ratio is often interpreted as a signal that a stock may be undervalued in relation to its earnings, making it potentially attractive to investors.
The comparison with other sectors of SWOOTs implies that the banking stocks may be priced more attractively relative to their earnings, potentially presenting investment opportunities for those seeking undervalued assets.
Strong Earnings Yield against negative bond yield as an Indicator:
The relatively higher earnings yield of the banking SWOOTs adds another layer of appeal for investors.
Zenith Bank (35.84%), GTCO (28.55%), FBNH (27.79%), and UBA (46.74%) showcase earning yields that surpass those of their counterparts and exceed the yield of the Nigerian 10-year bond at 13.3%.
This implies that for every Naira invested in these banking stocks, the investors can expect a higher return compared to the other sector stock.
While the relatively undervalued banking SWOOTs may attract investors seeking opportunities for capital appreciation, it’s crucial to consider the complexities associated with factors such as foreign exchange losses.
The presence of non-operational factors like foreign exchange gains/losses adds complexity and risk to the investment equation. In case of a loss, it can impact the bank’s overall financial health and potentially affect its future earnings.
Therefore, investors must carefully assess their risk tolerance and evaluate the potential rewards against the associated risks.
Diversification and a long-term investment perspective are often recommended to mitigate risks associated with individual factors impacting specific stocks.
Additionally, it is important for the banks to find ways to reward their shareholders and investors. While the Central Bank of Nigeria (CBN) may have instructed banks not to use foreign exchange gains to pay dividends, exploring alternatives such as bonus issues could be a means of passing on gains to shareholders while adhering to regulatory guidelines.
