Random Musings: Nigerian Banks and a little bit of Kenya

Dear Africa interested professionals:

It is banks' earnings season and the prominent Nigerian banks have already released their earnings: Zenith Bank, GT Bank, etcetera.  Despite the double digit dividend yields, only approximately 300 basis points lower than the coupon rate on Nigeria's thirty-year bond (13.2%), investors do not appear excited enough to maintain a consistent surge in demand in excess of supply leading to capital appreciation.  This is not the first time investor apathy towards Nigerian banking results and corporate actions has reigned supreme.  The journey to find out why started in earnest and here is a summary of my thoughts.  

1. Naira devaluation (especially during persistent downturns in oil prices) makes items more expensive in the local economy and makes banks lose their sense of value from an investor perception perspective.  "How good can these banks be when their prices are persistently low on an absolute basis?"  The highest priced bank in Nigeria is Stanbic IBTC at $0.08 (eight cents).  The highest priced bank in Kenya is Equity Bank at $0.44 (forty-four cents) while Kenya Commercial Bank is $0.39 (thirty-nine cents).  1 Kenyan Shilling is equivalent to 4 Naira! Stanbic IBTC is not even among the most sought after banks in Nigeria for investment purposes; this honor belongs to Zenith and GT Bank trading at approximately $0.06 (six cents). This is based on the official exchange rate of N416.50 (widely noted not to be reflective of the Naira's true market value which is nearer to N600 per $1.  In simple terms, the highest profile banks in Africa's largest economy sell for less than a dime ($0.10) per share.  As the naira continues to weaken, the share price of Nigerian banks that do most of their business in naira and report in naira will continue to be depressed despite their future positive corporate performance.  Perception metamorphoses into reality.

2. Mimimal returns over the long-term.  I referenced January 30, 2009 prices (more than ten months after the Nigerian index hit its all-time high , in the throes of global market collapse and over a month after the naira was devalued by 25% overnight) against the prices of high-profile banks in Nigeria as at March 9, 2022 - thirteen (13) years later.  

a) Zenith Bank - N12.10 vs N26.50 - 

b) GT Bank - N8.66 vs N26.15

c) Access Bank - N3.72 vs N10.10

d) First Bank - N14.38 vs N11.50

e) UBA - N6.67 vs N8.50

f) ETI (Ecobank Group) - N40.60 vs N11.00

g) FCMB - N4.15 vs N3.42

Over thirteen (13) years, (ignoring dividends) only Zenith, GT Bank and Access Bank have more than doubled in price.   Access Bank acheieved this after acquiring two other banks (Intercontinental and Diamond Bank) along the way.  GT Bank has the most impressive movement of 202%. In dollar terms, the price of GT Bank was approximately $0.06 in 2009 and is approximately $0.06 in 2022 if you utilize the artifical official rate of N416.50 to the $.  What is there to celebrate?  

3. Proliferation of outstanding shares.  Banks in their quest for bragging rights of largest market capitalization ($1B club), continued to increase their outstanding shares to astronomical levels.  This was easier to maneuver than share prices. There is an old adage "what is valued is never in abundance."  GT Bank presently has approximately 29 Billion outstanding shares; GT Bank had 14.9 Billion shares as at December 2008.  Zenith Bank has approximately 32 Billion.  First Bank has approximately 35 Billion. Access Bank has approximately 33 Billion outstanding shares. UBA has approximately 32 Billion shares.  Equity Bank Kenya and Kenya Commercial Bank have approximately 2.6 Billion shares each.  It is very difficult for a company with a watered down quantity of shares, to have a meaningful share price worthy of discussion. The three highest priced stocks (absolute price per share) on the Nigerian Stock Exchange are: Nestle (N1,435), Airtel Africa (N1,260) and Seplat (N990).  Their outstanding shares are 266m, 3.76B and 322m respectively.  You can see the much lower outstanding shares for these three companies, compared to the aforementioned highly visible banks.  

4. Self-interest ahead of business interest; investor confidence and enthusiasm wanes over time.  There is a rule that Nigerian bank CEOs cannot spend more than ten years at the helm.  There is also a loophole to get around it: create a holding company structure.  Is the Holdco structure really about earnings diversification and business strategy or about certain individuals trying to prolong their stay at the helm instead of stepping down? By the end of 2023, Herbert Wigwe will hit the ten year at the helm mark.

Breaking news: Access Bank adopts the Holdco structure.  Expect Herbert Wigwe to become the CEO of the Access Bank Holding Company just as Segun Agbaje became the CEO of GT Bank Holding Company during the middle of 2021, just as he hit the ten-year mark as the CEO of GT Bank.  While the same strategy was used by Ladi Balogun of FCMB, the major difference is FCMB has had a clearly diversified structure for many years prior; their Holdco structure was not an afterthought.  A classical case of 'killing two birds with one rock.'

A couple of years ago, there was massive selling of Access  Bank shares at and around the N11.00 mark by the current CEO, Herbert Wigwe; the stock nosedived soon after when the result and corporate action fell way below expectation.  A few months later and Access Bank's stock price had nosedived 40%, the same current CEO started buying back Access Bank shares ferociously.    

Nigerian banks have done well in rewarding investors with generous dividends and providing great yields for even the most passive of investors.  The banks have largely performed better on a yearly basis; this improved corporate performance has not generated capital gains worthy of note.  GT Bank has a dividend yield in excess of 10%, while year-to-date gain is a measly 0.6%. UBA has a dividend yield of approximately 10%, while year-to-date gain is 5.6%. Zenith Bank has a dividend yield of 10.6%, while year-to-date gain is 5.4%.  All three banks are yielding more through dividends than capital appreciation. Banks need to look inward and dig deeper to turn the tide in favor of loss weary and traumatized investors. This article is a good starting point. 

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I have a formula that I use to assess banks to determine which one has the best logical basis for a persistent price rise over the next year.  Last year, I did the calculation for ETI and got .79 which is impressive, but, not the ideal.  ETI rose in excess of 125% since then.  UBA got .70 for 2021 which is the best among the high profile banks I have done the calculation for using 2021 financials.  I willl leave you to determine what to do next.  

The Pen is mightier than the Sword