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Banks remain toast of investors

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Since the regulatory induced consolidation of the banking sector, banks’ stocks  have continued to be the toast of investors in the stock market, SEGUN EDWARDS writes.
The Nigerian Stock Exchange (NSE), trading activities, in more than four years, have consistently been dominated by the banks’ stocks. This trend could be partly attributed to

recapitalization of banks to a minimum of N25 billion as directed by the Central Bank of Nigeria (CBN).  To enable them meet the N25 billion becnhmark, a number of the banks resorted to the capital market to raise additional capital.

The banks competed to raise funds from the financial system, thus over-heating it. With enticing marketing strategies, the banks succeeded in their various offers, but left the capital market bleeding. The primary market experienced a boom while the secondary market was neglected. Many investors dumped their shares in the secondary market, to participate in the primary market offers. A total of N2.2 trillion was raised through various public offers dominated by the banks in 2008.

Within the period of July 2004 when the policy was announced and August 2007, about 10 banks approached the market to raise additional capital. In fact, about six of the banks approached the market twice within that period; while one bank obtained regulatory approvals to go to the market for the third time within that period. In most of the outings, the banks claimed to have recorded successful offers, through over-subscriptions.

Investors were attracted to the market through various campaigns by the banks, especially their emphasis on derivable capital appreciation, dividends history of the offering banks, and other mouth watering attractive returns on the investments.

This is evidenced in the position expressed by President Umar Musa Yar’ardua as the guest of honour at the commissioning of the new modern trading platform of the NSE that stakeholders in the market should moderate the skewing of activities in favour of the banking sub-sector.
Available statistics show that 20 banks rank among the 55 largest listed companies on the NSE, in terms of capitalisation, which make up the total wealth of the market. For instance, First Bank of Nigeria Plc is currently the most capitalised company, with N358.023 billion; trailing behind is Nigerian Breweries Plc; while Zenith Bank Plc ranks third with N351.640 billion in market value, United Bank for Africa’s capitalization worth N302.335 billion emerges fourth; and with N252.699 billion market value, GT Bank occupied the fifth position.

Other banks on the list of 55 largest companies, with the least capitalisation include Sterling Bank with N16.332 billion, Unity Bank N15.768 billion, and Wema Bank N12.325 billion.
On why banking stocks remain toast of investors in the capital market, experts analysis by Renaissance Capital Limited “Nigerian Banks - Will They Survive,” revealed that the Nigeria market could boast of returns in excess of 800 per cent since 2000, which placed the sector high in the consideration of most investors, including foreign ones, who viewed the banks return prospects as remaining tight, necessitating their shares being tightly held.

The assessment and evaluation of the sub-sectors was also based on a research conducted by International Corporate Research, a department of Stakes Capital Limited, which confirmed the leadership of the banking sub-sector.
According to the report, as at end of 2009, the top 10 equities with a total value of N2.5 trillion dominated the list of 55 largest companies, accounting for 56.7 per cent of its value and 52.2 per cent of the total market capitalisation end of the quarter.

The total market capitalisation of the 55 companies stood at N4.40 trillion, which is 92 per cent of the total market value of the first tier securities market of the stock exchange as at end of the quarter. Though in number, they only accounted for just 25 percent of listed equities.

Commenting on the impact of the banks losses in the recent audit carried out by the CBN, the Managing Director of Dependable Securities Limited, Mr. Chinenye Anyanwu, said that impact of banks’ poor financial results on the market came almost immediately, adding that due to bad results performance indicators of the market had taken a turn for the worst in recent times.

According to him, the fact that investors are not getting dividends and bonuses from banks is part of the grave impact, which has robbed off on the market since the industry crisis started.

He said, “The impact is what we are feeling already. Equities prices are dipping further resulting to further shedding of weight of market indices. In fact, the indices are not moving as they ought to. There has been wild fluctuation. We have bullish indices today, the following day, it is bearish. Who knows what the next day will look like? So, this is the grave impact we are feeling already.

“The fact that we are not expecting dividend immediately from most banks is part of the impact. Expectations of dividends and bonuses are the major factor that drives the market. However, investors are likely to shun the banking sub-sector stocks. Though, it remains the toast of the market.”

The National Coordinator of the Progressive Shareholders Association of Nigeria, Mr. Boniface Okezie, agreed that the banks’ losses have impacted negatively on the capital market with prices of shares dropping, especially those of the rescued banks.

Okezie said, “Prices of shares are dropping; nobody is buying as investors have finally lost hope of getting dividends and bonuses. In spite new listings and owing to what happened recently in the banking industry, the market indices have fallen to the lowest levels ever. The huge provisioning which the CBN has compelled banks to make has sent more negative signals to investors.”

“People are investing to get returns. In the banking industry today, they are not paying shareholders any returns in terms of dividends. What is the cause? Provisioning. The huge provisioning has denied them of bonuses and dividends, which are the only reason for investing in any equities.

“You asked the banks to make provision according to prudential guideline. In the past, banks have been making provisions on non performing loans, which also will be recovered at the end of the day if the banks apply aggressive market drive. Why do you now ask them to continue to make provisioning even in an unaudited account?
“The negative impact of the banking industry crisis on the stock market can be seen from the significant losses in the half year financial results of 10 banks that put the equities market on the spot.”

It was revealed that the financial reports of six of the rescued banks accounted for over N1.2 trillion operational losses. The affected banks include Union Bank, Oceanic Bank, Intercontinental Bank, Afribank, Bank PHB, Spring Bank, Equitorial Trust Bank ETB), and Finbank.

The results released to council of the Exchange are as follow:
Union Bank of Nigeria Limited Plc: Unaudited result for the half year ended 30th September 2009 shows Gross Earnings of N97.506 billion, as against N59.715 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N222.858 billion compared with profit after tax and exceptional items of N14.193 billion in 2008. The bank explained that the exceptional items included provisions for pensions, gratuity and long outstanding unreconciled items. Also, the significant loss recorded was due to provisioning arising from the joint CBN/NDIC examination and subsequent independent stress-test revealing an under-funded pension scheme and a non-funded gratuity scheme as well as significant unreconciled items.

Oceanic Bank International Plc: Unaudited result for the third quarter ended 30th September 2009 shows gross earnings of N46.830 billion, as against N112.265 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N286.036 billion compared with profit after tax and exceptional items of N29.082 billion in 2008. The bank made provision for losses of N315.115 billion, up from N1.161 billion in 2008.

The board of directors attributed the decline in the bank’s earnings to the suspension of interest of N93.9 billion on the various non-performing loans during the current period. The bank recorded loss before tax but after exceptional items of N400.901 billion compared with profit before tax but after exceptional items of N36.524 billion in 2008. The bank obtained tax waiver of N114.864 billion, which caused a reduction in the loss after tax and exceptional items to N286.036 billion in 2009. The bank’s management is confident that having taken these provisions, the financial statement now shows a true and fair value of the quality of the bank’s assets. Also, the management believes that the probability of booking additional provisions is low and that as on-going recovery efforts continue to yield positive results, there will be corresponding write back to the bank’s Profit and Loss Account.

Afribank Nigeria Plc: Unaudited result for the half year ended 30th September 2009 shows gross earnings of N64.238 billion, as against N43.284 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N71.225 billion compared with profit after tax of N11.866 billion in 2008. The bank provided for risk assets of N647.84 million and exceptional items of N83.503 billion in 2009.

Intercontinental Bank Plc: Unaudited result for the seven months ended 30th September 2009 shows gross earnings of N119.770 billion, as against N161.822 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N328.450 billion compared with profit after tax and exceptional items of N28.561 billion in 2008. The group has fully provided for the significant amount of N195.37 billion as loan loss provision and N241.32 billion as dimunition on investments and other known losses during the period under review.

The loan loss provision amount included the recommended additional loan loss provision of N117.83 billion from the joint CBN/NDIC examination. The group recorded loss before tax but after exceptional items of N447.451 billion compared with profit before tax but after exceptional items of N33.033 billion in 2008. The Group obtained tax waiver of N119.001 billion, which caused a reduction in the loss after tax and exceptional items to N328.450 billion in 2009. The Group has embarked on aggressive loan recovery exercise and has recovered over N78 billion to date since the CBN intervention. The Group does not anticipate any unusual occurrence that would adversely affect the results for the remaining of the period up to December 31, 2009.

Finbank Plc: Audited result for the half year ended 31st October 2008 shows gross earnings of N31.474 billion as against N37.987 billion as at period ended 30th April 2008. Loss after tax and exceptional items stood at N80.772 billion compared with N1.074 billion as at period ended 30th April 2008.

Unaudited result for the 11 months ended 30th September 2009 shows gross earnings of N59.542 billion, as against N50.187 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N120.686 billion compared with profit after tax and exceptional items of N8.256 billion in 2008. The loss position of the bank was caused by provision of N88.8 billion for delinquent loans and advances in line with CBN audit and diagnostic review. Also, the exceptional items of N25.9 billion reported in the accounts relates to provision for potential losses on guarantees and write-off of long outstanding general ledger balances prior to the merger of the bank effected in 2005.
London-based strategist, Christopher Hartland-Peel of Exotix Limited, had in a report in Bloomberg.com, said: “The Nigerian banks clearly have value. The shares are going to be the most interesting part of the sub-Saharan Africa universe in 2010.

“Nigeria, last year’s worst- performing stock market, is rebounding as the world’s lowest valuations and projections for record bank profits are expected by year end. The nation’s benchmark All-Share Index has rallied 10 per cent in 2010 after tumbling 34 per cent last year, the biggest drop among benchmark indexes in the 70 largest equity markets. Profits at First Bank of Nigeria Plc, Guaranty Trust Bank Plc and Stabic IBTC Bank Plc will climb an average 43 per cent.”
Also, Jamie Allsopp, of Insparo Asset Management Limited, a London-based firm, believed that the Nigerian market is picking up, due to the upbeat activities in the banking sub-sector contribution to the economy or investors interest in the sector in the capital market. 

“Banks are offering a lot of value, their equities are still cheap. Nigeria’s economy is set to grow 4.8 per cent this year after expanding 4.3 per cent in 2009, according to the World Bank. That compares with the Washington-based lender’s forecast for 2.7 per cent growth in the global economy. Oil prices have jumped to $74 a barrel from about $35 in December 2008,” he said.

In his report, Andrew Howell, an emerging-market strategist at Citigroup in New York, said the growth rate helps make Nigeria one of the world’s most attractive so-called frontier markets.

He said, “Nigerian shares are recovering from two years of losses spurred by a collapse in oil prices during the global recession and a banking crisis sparked by bad loans to stock speculators. Toxic assets at banks may have reached as much as $10 billion, according to estimates by New York-based research firm Eurasia Group.”

In another report, Chairman, Templeton Asset Management, Singapore, Mark Mobius, said: “While developing-nation equities may face short-term declines, markets remain in a “secular” rally driven by accelerating economic growth and consumer demand. Nigerian stocks are attractive and banks provide the nation’s “most interesting” investment opportunities. “It’s a good market. Investors are paying the equivalent of $4.60 for every dollar Nigerian companies will earn this year. That compares with $8.40 in Pakistan, $8.50 in Greece and $13.80 in the U.S., show a lot. Increased consumer lending will fuel bank earnings.

About 15 to 20 per cent of Nigeria’s 150 million people have bank accounts.
“First Bank of Nigeria Plc, the country’s biggest lender by market value, may earn N2.2 per share in the fiscal year ended March 2011, up from N1.87 this year, according to the average of seven analysts’ estimates compiled by my company. The Lagos-based company trades at 6.7 times profit estimates, compared with 12 times for the MSCI Emerging Markets Financials Index.

“The stock, up 5.3 per cent this year, may gain 38 per cent in the next 12 months, according to the average of projections on Bloomberg. Guaranty Trust Bank Plc, Nigeria’s third-biggest lender, may increase per-share earnings 67 per cent this year, according to analysts’ estimates. The shares trade for 8.2 times profit projections after climbing 19 per cent in 2010.”

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