African Banks and Debt Accumulation: Investor Perception?

Dear Africa Interested Individuals:

                                                         

            Corporate debt continues to rise across emerging markets.  Some observers are unconcerned because a financial crisis has not set in as a result of rising corporate debt.  Debt accumulation should be of concern even when a financial crisis has not been triggered.  

China's Central Bank governor warned in March 2016 that "the country's corporate debt levels are too high and are stoking risks for the economy."  The Bank for International Settlements also warned in March 2016 that "a steep rise in private and corporate debt in emerging market economies - including the largest - was eerily reminiscent of the pre-crisis financial bloom in advanced economies."  

Glencore (Anglo-Swiss commodity trading and mining company) recently agreed to sell a 9.99% stake in its agricultural business to help cut its debt amid a prolonged rout in commodity prices.  The stake will be bought by a Canadian pension fund (British Columbia Investment Management Corp) for $625m. Glencore seeks to sell up to five billion dollars worth of assets in 2016 to help reduce debt.  Glencore had already sold a 40% stake in its agricultural business in April to Canada Pension Plan Investment Board for $2.5 billion.  So what are African banks doing about their rising corporate debt?  What do investors think about African banks that are debt burdened and not debt burdened?  Let us go on a journey.  

I selected six major African stock markets: Kenya, South Africa, Nigeria, Ghana, Mauritius and Egypt.  I selected two visible banks in each market; except Kenya and Nigeria where I selected three visible banks.  This does not imply that all other banks not selected in each market are not visible.  Banks and investor perception will be assessed on an individual market basis.  

As I have written in prior articles, I deem a debt-capital ratio (D/C) in excess of 30% to be excessive and the company in question to be debt burdened.  This classification will also apply for this analysis.  I selected three price-related variables to gauge investor perception: P/B, P/E & P/Assets.  I also deemed another ratio to be of importance when reviewing the results: relating a bank's capital (TC) to its non-loan assets (referenced as A-L/TC).  Prices are as at June 10, 2016.  Audited FY 2015 financials are referenced.  Let's get started.

1.  Egypt

A.  Commercial Int. Bank:  P/B - 4.2,  P/E - 12.0,  P/A - 0.3,  D/C - 1.1%, A-L/TC - 10.2

B.  Credit Agricole Bank:    P/B - 2.1.  P/E - 6.9,    P/A - 0.2,  D/C - 0.8%, A-L/TC - 9.1

2.  South Africa

A.  Barclays Africa:  P/B - 1.3,  P/E - 8.7,    P/A - 0.1,  D/C - 54.1%,  A-L/TC -  1.5

B.  Capitec Bank:      P/B - 5.0,  P/E - 20.9,  P/A - 1.1,  D/C - 39.2%,  A-L/TC - 1.2 

3.  

Nigeria

A.  Zenith Bank:  P/B - 0.8,  P/E - 4.5,  P/A - 0.12,  D/C -  52.1%,  A-L/TC - 1.6

B.  GT Bank:        P/B - 1.3,  P/E - 5.6,  P/A - 0.2,    D/C - 45.5%,   A-L/TC - 1.5

C.  UBA:               P/B - 0.5,  P/E - 2.7,  P/A - 0.06,  D/C - 39.3%,   A-L/TC - 3.1

4. 

Ghana

A.  Ecobank:      P/B - 2.1,  P/E - 5.8,  P/A - 0.3,  D/C - 26.6%,  A-L/TC - 1.8

B.  CAL Bank:   P/B - 0.8,  P/E - 2.6,  P/A - 0.1,  D/C - 68.2%,  A-L/TC - 1.0

5. 

Kenya

A.  I&M Holdings:  P/B - 0.1,  P/E - 0.5,  P/A - 0.02,  D/C - 33.7%,  A-L/TC - 1.2

B.  Equity Bank:      P/B - 2.1,  P/E - 8.7,  P/A - 0.3,    D/C - 32.2%,  A-L/TC - 1.5

C.  KCB Group:      P/B - 1.3,  P/E - 5.6,  P/A - 0.2,    D/C - 19.9%,  A-L/TC - 2.1

6.  

Mauritius

A. SBM Holdings:  P/B - 0.8,  P/E - 10.7,  P/A - 0.1,  D/C - 21.3%,  A-L/TC - 2.4

B.  MCB Group:     P/B - 1.3,  P/E - 8.8,    P/A - 0.2,  D/C - 28.5%,  A-L/TC - 2.2

After analyzing the numbers, I spotted something I expected and something I did not. I expected the banks with lower debt-capital ratios in each market to have higher multiples for price-related variables.  This did happen; but, not in every scenario.  This got me stumped for awhile.  Were the anomalies random or deliberate?  

My key premises are:

1.  When both visible banks in each market are not debt burdened i.e.Egypt and Mauritius, the bank with higher debt-capital ratio typically has the higher multiple for all three price-related variables.  This implies investors look favorably on debt below a maximum threshold and drive up its price.  The only exception to this was the P/E for MCB group.  This does not invalidate the premise in my opinion.  Given the price movement for both banks so far in 2016, I expect this anomaly to be non-existent soon and without much ado.  MCB Group has risen 2% while SBM Holdings has declined 7% year-to-date as at June 10, 2016.  This can also be seen as a cue to purchase MCB...

2.  Whenever at least one visible bank is debt burdened in a market, the bank with the lower/lowest debt burden has the higher multiple for all three price-related variables.  Once at least one visible bank is debt burdened, investors favor the bank with the lower/lowest debt-capital ratio for investment purposes.  Now this is where it gets more interesting.  Two major markets violated this: Nigeria and Kenya.  

All three Nigerian visible banks are debt burdened.  UBA is the least debt burdened among the three.  Based on premise 2, UBA should have the highest P/B, P/E and P/A among the three banks.  A cursory look is enough to tell you that this is not the case.  Why is UBA not getting the proper multiple it deserves?  This equates to a P/E in excess of 5.6, P/B in excess of 1.3 and a P/A in excess of 0.2.  Kindly note that the A-L/TC is better when lower.  It helps me to know how stretched a bank is in relation to its peers.  Observe the similarity in the A-L/TC answers for Zenith and GT Bank.  UBA is in a world of its own at 3.1x.  UBA's share price is not where it is supposed to be on the upside because the bank is over stretched in relation to its peers in the same market.  UBA will need to sell down some of its assets if the bank is to get an appropriate pricing (within the context of the Nigerian market) from investors.    

The only Kenyan bank not debt burdened is the one that violated premise 2.  Equity Bank has a higher multiple across all three price-related variables than Kenya Commercial Bank (KCB) despite being debt burdened.  Why?  The same scenario that plagued UBA's investment viability is also impacting KCB.  The A-L/TC for KCB is not in close proximity to that of Equity Bank and I&M Holdings which are closer to 1X while KCB is closer to 2X.  KCB's share price is not where it is supposed to be on the upside (despite proper debt management) because the bank is overstretched in relation to its peers in the same market.  KCB will need to sell down some of its assets if the bank is to get an appropriate pricing (within the context of the Kenyan market) from investors.  

Investors do not like debt-burdened banks AND more importantly, banks that are overstretched in relation to their peers.  I will add that in general, A-L/TC in excess of 1.95X should be a cause for concern.

Investors in KCB and UBA, ask the management of your bank to sell down some assets like Glencore just did.  I am of the very strong view that you will smile to the bank if both banks listen to your advice.  Despite the gloomy investment outlook across most African markets, UBA and KCB can rise further and quickly, if they just sell off some of their assets for cash!  I will have to truncate this here.

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