Will Nigerian Banks Collapse in 2016?

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Godwin Emefiele
Emefiele

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Allan Gray Group, privately-owned investment company is predicting that some Nigerian Banks will bust or raise capital in 2016

By Anayo Ezugwu  |  May 18, 2015 @ 01:00 GMT  |

A NEW report by the Allan Gray Group, Africa’s largest privately-owned investment management company has raised fears over the liquidity of Nigerian banks. According to the report, a few Nigeria banks may go bust or raise capital next year. The report, which examined the lenders’ performance as of the end of March, said:  “Sentiment towards Nigerian banks has gone from positive to outright fear. The fear is not without reason given the falling oil price, likely spike in bad debts, political uncertainty and Boko Haram insurgency.” According to the group, “It is indeed likely that there will be a lot of distress next year, but it is important to remember that what a company earns in a particular year generally has little bearing on the intrinsic value of the business; what counts is the level of normal earning through the cycle and the ability to grow those earnings.”

Financial companies are a little different in this regard as they may go bankrupt before achieving normal earnings. A few Nigerian banks may go bust or raise capital, but luckily the share prices are discounting this probability, the report said.

The Allan Gray report, entitled ‘Gray Issue: The Sentiment Pendulum’, also compared Nigerian banks with Kenyan banks relative to their assets and the Gross Domestic Product of their respective countries. The research and investment firm said there was no reason why the Kenya banking sector should be any more or less profitable than the Nigerian in the long term, arguing that over the past 10 years the return on equity, ROE, for the two sectors have been similar.

The ROE measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. “With a similar ROE, the Price-to-Book value for these two countries’ banks should be fairly close. However, the largest five listed banks in Kenya are trading at 2.6 times book value, discounting a long-term ROE of about 26 percent, while the Nigerian banks trade below book value, indicating a long-term ROE of around 10 percent.

“The market capitalisation of the companies relative to the assets on the balance sheet tells a similar story, with Kenya banks pricing in a return on assets 3.5 times that of Nigerian banks. In the Allan Gray Africa ex-SA Equity Fund we have a significant investment in Nigerian banks and very little in Kenya banks. We think the terrible sentiment and clear risks are giving us the opportunity to buy decent businesses, with favourable long-term prospects, at very attractive prices.”

The Price-to-book value is a financial ratio used to compare a company’s current market share price to its book value that is to say  the value of the of a company’s net assets expressed on the balance sheet. Industry players and analysts had said a number of regulatory measures aimed at stabilising the economy would make it difficult for banks to make higher profit this year.

Mustafa Chike-Obi, managing director, Asset Management Corporation of Nigeria, recently said falling oil prices would cause “serious economic headwind” this year and banks would be forced to record very significant increase in non-performing loans. “We can see that there is an economic headwind coming to Nigeria this year; and when the economic headwind comes, it will certainly impact on the Non-Performing Loans levels. So, we expect an increase in the NPL levels this year.”

Also, Fitch Ratings had in a report released on October 8, 2014, said that although the banks’ NPLs were below five per cent as of last year, it would not be sustainable in the long run.

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