Guaranty Trust Bank (GTB), Nigeria’s largest lender by market capitalisation kicked off the third quarter (Q3) earnings season for banks when it released results last week.
The banks net income rose 3.4 percent to N147 billion, driven by a marginal rise in net interest income +1 percent to N172.9 billion, a 2.8 percent increase in non-interest income to N101.8 billion and a 2.2 percent decline in total operating expense to N99.6 billion.
Return on Equity (ROE), came in at 33 percent, while cost to income ratio dropped further to 36.85 percent. The bank is the most efficient lender in the country, with average cost to income ratio for the rest of the universe of banks hovering near the 50 percent mark and above.
However the stock has returned -22 percent in the past year and closed trading at N26.3 a share on Friday. The NSE banking index has returned -19.9 percent by comparison.
GT Bank traded as high as N49 a share in January 2018, meaning it is down some 46 percent in almost 2 years, meanwhile earnings are up in that time period.
It goes without saying that GTB is among the best in class in the Middle East and Africa (MEA), region where very few banks are throwing out ROEs of 30 percent plus, which begs the question about what is ailing the banks and are they a buy at these depressed levels?
GTB had for a long time traded at a wide range between N20 (bottom) and N30 (top), and traders/investors had hoped that once it broke out of the range (move above N30 per share), which it did sometime in May 2017, the former top or resistance level would become support, alas that was not to be as its shares have fallen below the N30 mark.
Beyond the technical analysis, there are fundamental reasons why banks are selling off. First a rash of regulatory pronouncements by the Central Bank of Nigeria (CBN) has made investors skittish about their prospects.
On Wednesday July 3, the CBN issued a notice to all banks in a circular with reference number BSD/DIR/GEN/MDD/01/045, signed by Ahmad Abdullahi, director, banking operations, directing them to maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent by September 30, 2019.
It said the ratio “shall be subject to quarterly review.”
The apex bank warned that failure to meet the stipulated minimum LDR by the specified date “shall result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 percent of the lending shortfall of the target LDR.”
The CBN subsequently debited a levy of about N500 billion from accounts of Banks that failed to meet the 60 percent minimum LDR on the 26th of September of which GT bank was debited a total of N25.1billion. However sources suggest that the CBN refunded N200billion, to banks, whose LDR position improved between the 26th (debit date) and the 30th (deadline date).
The CBN has also subsequently jerked up the minimum LDR ratio Banks are to maintain to 65 percent.
Another Circular was released barely a week later on July 10th by the CBN, limiting the amount of excess cash Banks can park with it and earn interest on.
In the circular FMD/DIR/CON/OGC/12/019 to all banks and discounts houses titled ‘Guidelines on Accessing the CBN Standing Deposit Facility (SDF)’, signed by Angela Sere-Ejembi, director, financial markets department, the CBN said the remunerable daily placement by banks shall not exceed N2 billion.
The SDF is basically a liquidity mop-up mechanism which the CBN uses without necessarily issuing government securities.
Prior to November 2014, banks could deposit as much liquidity at their disposal with CBN and be remunerated (paid interest) for same.
The CBN capped the minimum remunerated deposit through the window at N7.5 billion in November 2014, however banks could keep excess cash with the CBN earning zero percent as they wished.
With the new framework, the allowable daily deposit through the SDF that will now be paid interest on by the CBN is now capped at N2 billion at the applicable Monetary Policy Rate (13.5% today) minus 500 basis points, equivalent to 8.5 percent.
These measures by the CBN limit the banks interest earning capacity by limiting funds which they can use to purchase high yielding Government and CBN securities.
Another major issue facing the banks is the rise of competition such as Fintechs and mobile money providers. It is a threat facing banks globally but which Nigerian lenders have failed to tackle until now.
Most young people who are often tech savvy would rather bank on their phones than visit a physical branch. If the Fintechs and mobile money providers succeed in pushing more Nigerians to use their platforms then that would obviously eat into banks profitability and by extension their valuations in the market.
In a sense the need for the CBN to have to force the banks to lend shows the static and non-innovative state of the sector.
So are the banks a buy? Best in class names like GTB probably are a buy at these levels, but for multiple expansion to happen for financials, banks need to innovate and provide solutions for Nigerians.
If not they risk becoming mere afterthoughts which provide a safe place to deposit money or people use to receive salaries, after which they move funds to their preferred Fintech platforms for investments and other solutions.
