1. Between NDIC and AMCON: Recalibrating Regulatory Roadmaps
Nigerian Banks typically trade below the valuation of their net assets and only a few banks are priced at par with the breakdown value of their underlying assets. Banks are priced based on investors’ wild whims and wobbly expectations. Stockbrokers asked about local banks’ relatively low price-to-net asset value (NAV) listed on the Nigerian Exchange Limited (NGX). They came with explanations that confirmed confusion rather than established conviction. One of the brokers questioned concerning bank net asset valuation noted that “nobody can tell why prices are low relative to net assets. A general notion is that bank loan asset qualities are black boxes and trying to value bank loan assets is like figuring out how water gets into coconuts. The market discounts loan assets, and the higher the loan assets as a proportion of total assets, the lower the likely price to book value “.
A Lagos-based stockbroker offers an alternative explanation: “analysts have generally been more concerned about future discounted earnings per share than corporate asset values. So, stock prices reflect expected cash flows rather than present or future asset values.”
The difficulty in understanding the low prices of listed banks on Nigeria’s NGX suggests the often-repeated quote by Phillip Fisher “The stock market is filled with individuals who know the price of everything, but the value of nothing.” Fisher’s view might be harsh in describing the Nigerian investor, but it may not be far from the mark.
The Point of Departure
To appreciate analysts’ concern about the values of listed stocks on the NGX, a bird’s eye view of the market’s banking sector leaves analysts’ imaginations breached. In the case of GTB, price to book value (P/BV) over the previous ten years has fallen from 2.4 in 2012 to 1.29 in 2015 (at the beginning of a recession) to 1.94 in 2017 (at the end of a recession). In 2021 the bank’s price-to-book value surprisingly tumbled to 0.95. For FBNH, the financial holding company has had a P/BV below one over the last decade. The highest P/BV ratio was seen in 2012 when it was 0.89. With the lender’s share price dipping from N16.30 in 2013 to N3.46 in 2016, Holdco’s P/BV tumbled by -82.56%. On December 31, 2021, the deposit money bank’s (DMB’s) price was a third of its net asset.
Similar to GTB and FBNH, UBA’s P/BV has not exceeded N1 except since 2013. In the five subsequent years, P/BV ranged between 0.67 in 2017 and 0.34 in 2021. The historical P/BV reinforces what appears to be a broad market pricing anomaly.
Stanbic IBTC has, however, continued to defy the trend, as its Price to Net Asset Valuation has consistently exceeded 1. In 2021, the bank recorded a P/BV of 1.24 while this suggests that the market valuation of the bank has continued to be higher than the valuation of its net asset valuation, a look at the figure suggests that the bank has recorded a steady decline in its P/BV. Having previously been as high as 2.05 in 2017 (see illustration 1 below).
Illustration 1:
Low Asset Turnover: The Elusive Puzzle Piece
The average Return on Assets among Nigerian Banks is around 1.2%, which analysts say is the most critical reason why the share price of Nigerian banks trades below their netbook valuation. But what is the ideal Return on Assets (ROA)? The combination of the Capital Assets Pricing Model and the DuPont model can help resolve the puzzle. If we assume a 15% risk-free rate (approximating the yield on the 10-year FGN Bond, also given that long-run inflation is about that).
Assuming a 10% equity premium, the ideal Return on Equity (RoE) would be 25%. With a prudential Tier 1 Capital Adequacy Ratio (CAR) set at 11.25%, an inversion would produce an ideal leverage ratio of 8.8. By dividing the ideal ROE (25%) by the ideal leverage ratio (8.8), we obtain an ideal ROA of 2.85%. The Return on Assets of the Nigerian Banking Sector as of 2021 was 1.2% which is less than half of the perfect return on assets (see illustration 2 below).
