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Telling people to buy shares in a falling stock market sounds like asking a sleepy market analyst to take an extra cup of coffee; a sure prescription for trouble? Maybe not.
Truth be told, the tumbling of prices on the Nigerian Stock Exchange (NSE) is jamming open a number of great opportunities for future price gains. Granted nobody likes seeing assets lose value but sometimes it is necessary in the short term. By dropping a few points the exchange is creating room for higher market returns for investors when the market rebounds by the middle of the year. Besides, buying stocks low when markets fall during panics is a tactic that usually turns up tidy profits.
The current low value of the market has created some opportunities to pick up a few stocks on the cheap. The trick is to know what to pick and when to pick it. The banking sector, for example, looks like a decent hunting ground for buying a few great stocks at lovely prices.
The orange view
Take GT Bank (recent price N24), for example. The bank has grown and sustained a sizeable market share of both corporate and retail clientele over the last decade or so, being a chief beneficiary of the flight to safety of many customers after the bank consolidation exercises in 2005, when weaker banks were instructed by the Central Bank to either recapitalize or merge. As the number of banks shrunk from over 80 to 25, several customers did a dash for what they saw as a ‘corporate safety valve’; which was reflected in the stunning growth in the banks deposit base and the number of walk through customers it had to handle daily. Nevertheless, the early customer press has simmered down as the bank now deals with customer service quality and corporate relationship issues. In terms of financial performance, few can pull a face at the bank’s balance sheet.
Beyond market size, GT has shown strong operational performance that has not been too common in the industry. The banks third quarter Net Interest income to Gross Earnings was 40.3 per cent suggesting strong underlying profitability in its core business, Net Interest income year-on-year grew by 10.5 per cent between the third quarter of 2015 and third quarter of 2016. Non Interest Income as a proportion of Gross Earnings was 15.3 per cent, pointing to the fact that the banks fee-based business is still fairly shallow. From the perspective of strategy what the bank appears to have done is to retain excellence in its non-fee based retail and corporate banking businesses while it concedes territory to its rivals (particularly StanbicIBTC and Standard Chartered Banks) in the fee-earning end of the market.
This works well as long as low deposit rates and high lending rates prevail in the local money market. Deposit rates currently average about 9.10% per annum while lending rates average 17.09% per annum, leaving an average spread of 7.99%. However, if tight monetary policy stays to support loose fiscal spending, then uncertainty concerning inflation rate in months ahead could really hurt yields and worsen the quality of bank risk assets (loans and advances) as manufacturers and traders choke on rising costs and escalating loan charges. With inflation presently at 18.8%, the signs of trouble ahead are clear.
Does this suggest a Frankenstein monster? Not really. GT Bank has shown grit in its business operations. The banks provisions for bad loans as a per cent of average loans it has on its books are in the region of 4.01% or 7% lower than the industry average of 11%, this means that it has fewer bad debts to deal with than its industry rivals. A couple of other indices recommend the bank. Return on Equity (ROE) at 32.64 per cent and Return on Asset (ROA) of 5.20 per cent are among the best in its class, as a few other banks have seen their ROE crash below 20 per cent and their ROA literally disappear. The banks most recent book value per share (a measure of what it would be worth on breakup) is N17.15 or 28% lower than its recent market price of N24, suggesting that there could be strong future earnings expectation by traders. GT has shown a capacity to deliver a dividend yield of 6.23 per cent (on a five year average basis) and a dividend growth rate of 12.10 per cent over the last five years. On a year-on-year basis the bank has posted a capital appreciation of 58.51 per cent, despite a year-to-date decline of -2.79 per cent. Median market analysts forecast for the year see the banks share price rise to N28 per share or 17 per cent above present value (see chart).
A trader’s best friend
But GT is not the only financial sector cherry. Zenith Bank Plc (recent price N14.73) is also quite attractive. The bank has over the years built a reputation for its aggressive penetration of the retail banking segment across the country. At a point the bank was seen as Nigeria’s premier retail lending institution with as high as 55 per cent of the market amongst traders of eastern extraction who felt that the bank catered specifically to their needs as importers of packaged goods and automobiles (Zenith’s dominance in this market segment has since been whittled as banks like Fidelity and Diamond Bank have chiseled away at this market segment). The banks funding process was fast, uncomplicated but pricey. This suited the traders well as they could always pass the added cost to consumers. But with recession slashing at real disposable incomes this has become ever more difficult and banks are finding that customer tolerance for higher interest charges is waxing thin.
But regardless of these challenges, Zenith appears geared for sustained growth as its third quarter profit after tax figure rose by 20 per cent year-on-year between 2015 and 2016 and its gross loans and advances grew by a further 22.6 per cent year-to-date, while return on average equity hit an impressive 20.7 per cent. True enough the bank has seen a slight dip in its net interest margin which slid from 7.9 per cent in 2015 to 7.6 per cent in 2016, the margins on the banks core business of lending is still sturdy compared to that of a number of rivals.
Warm weather, good harvest
With warm weather creeping up on investors, the lousy fortunes of a number of shares may begin to take a turn for the better, especially when the fiscal stimulus expected from the federal authorities begins to make its way through the economy by the middle of June. This should lift the prices of stocks a bit as the economy shows signs of growth. .