Market value puts Tier 2 banks ahead of peers
Contrary to the popular belief that the banking industry is dominated
by the big four - First Bank, GT Bank, UBA and Zenith Bank - which
are considered to be in the tier one or industry leaders, market
sentiments, particularly in the post-banking reforms seem to favour
the tier two banks, comprising, Access Bank, Diamond Bank, FCMB
and Skye bank, based on some indices, according to Renaissance
Capital (Rencap).
Tier one capital is the core measure of a bank’s financial strength from
a regulator’s point of view. It is composed of core capital, consisting
primarily of common stock and disclosed reserves (or retained
earnings).
It
may
also
include
non-redeemable
non-cumulative
preferred stocks. The essence is its ability to provide protection
against unexpected losses. The tier one capital ratio is the ratio of a
bank’s core equity capital to its total assets, while the tier two risk
based capital ratio on the other hand is the ratio of a bank’s core
(equity capital) to its total risk-weighted assets. Risk-weighted assets
are the total of all assets held by the bank which are weighted for
credit risk, according to a formula determined by the CBN.
The analysts had in October last year on who will be industry leaders
said that “post audit, we expect Guaranty Trust Bank, First Bank , UBA
and Zenith Bank (the big four) to emerge as clear system leaders with
a collective equity share of 54 percent against 35 percent pre-audit.
With a 35 percent asset share post–audit, we estimate these banks
could add 19 points to their asset market shares over the next couple
of years, all other things remaining constant.”
They also observed that rather than follow the big four, tier two banks,
such as Access, Fidelity, Diamond, FCMB, Skye and Stanbic IBTC, “will
take advantage of the current market environment to buy scale and
position their businesses for leadership status.” Specifically, the
analysts in an industry update, released to BusinessDay posited that
the big four banks currently trade at an estimate of about two times
higher than its market price, which is price to-book ratio (P/B). This,
according to them, represents 66 percent premium to the tier two
banks which on the other hand, are currently trading below their
current prices by 0.88 times.
P/B ratios are commonly used to compare banks, because most assets
and liabilities of banks are constantly valued at market values. A
higher P/B ratio implies that investors expect management to create
more value from a given set of assets, all else equal (and/or that the
market value of the firm’s assets is significantly higher than their
accounting value). The ratios also give some idea of whether an
investor is paying too much for what would be left if the company went
bankrupt immediately.
Interestingly, the analysts also said that the 2011 Return on Average
Equity (ROAE) of the big four currently at 29 percent, “does not differ
materially from that of the tier two banks (23 percent) on our
estimates.” Return on Average Equity shows a company’s performance
over a fiscal year. It can give a more accurate depiction of a
company’s corporate profitability, especially in instances where the
value of the shareholders’ equity has changed considerably during a
fiscal year.
Interestingly, the share prices of the big four as at Wednesday stood
at First Bank 13.15; GT Bank,16.90; UBA 10.50 and Zenith 13.00 with
tier two at Access Bank 7.99; Diamond Bank 7.61; FCMB 7.68 and
Skye bank 8.25. The analysts said that the premium of the big four
banks is being exaggerated, adding that the valuation gap between
the big four banks and the tier two counterparts can primarily be
explained through liquidity. They further observed that the tier two
banks are currently trading at $0.7 million a day, on average, down
from $1.5 million in 2008. However, they said that as average daily
volumes have fallen 51 percent since 2008, tier two bank valuations
have fallen 49 percent over the same period.
The resort to playing value now, according to the analysts, is as a
result of the fact that liquidity levels at the stock exchange will
continue to improve over the second half of this year based on, among
others, lower rates, higher average oil prices and production, resilient
depositor growth and regulatory clarity. They observed with interest
the fact that liquidity levels of the tier two banks have been improving
and trading around $1.2 million a day, adding “as more tier two banks
begin to trade over $1 million a day, we believe their re-rating will
gather momentum.”
Consequently, the analysts said that taking a critical look at the stocks
of all the banks that passed the Central Bank of Nigeria (CBN)’s audit
test, opportunities abound in the sector. “This opportunity favours the
four tier two banks which are trading at significant discount to the
sector’s big four banks. The tier two banks are trading at 40 percent to
the big four banks despite their weighted average 2011E RoAE being
only seven percentage points over (23 percent against 29 percent).”
“Although we are very positive on our universe of investible banking
stocks, we do not believe that the current valuation gap between the
big four and tier two banks is sustainable. We say this because we
believe that the current valuation gaps in the sector are driven
primarily by liquidity and not operating performance,” they said."
JOHN OMACHONU
BUSINESSDAY June 11, 2010