April 23 (Lagos) - On 28th March, the Central Bank of Nigeria (CBN) published its circular on bank re-capitalization and since then the NGX Exchange’s bank index has fallen 23.4%.
Has the sell-off gone too far? Let us take a look at this question. This piece is an opinion article. Our analyst gives his take on the matter.
The investors think that rights issues are in the offing and that equity dilution is on the cards. Lets take a look if the sell-off in the banks has gone too far.
The top fear in the minds of Bank shareholders is the dilution and the amount of dilution they are considering here. Those fears were compounded when GT Bank (
GTCO ) made public its plans to issue 15 billion with a
B new shares. That would mean that the dilution would be in the range of 50% for its shareholders based only on released information. Shareholders have responded by dumping their shares which is understandable given the dilution.
Another factor that caused confusion is the cancelled meeting of First Bank (
FBNH ) where they were going to discuss the raising of N 300 billion. The acrimony in that boardroom is well known to the public and the cancellation of the meeting raises questions as to whether "one" of the big men in that boardroom will take this opportunity to pump that cash into the Bank and officially take over the Bank. Shares have sold off as investors remain confused and unclear about the state of affairs by the board.
The other big banks i.e. Zenith (
ZENITHBANK ) &
UBA has possibly handled the matter in the best manner and not announced any plans yet. Their shares have also sold off in solidarity with GT and First.
The smaller banks also sold off because they are in a far more precarious position as they are far away from the goals set by the CBN to continue as International Banks or even National level banks. They are going to be merged or acquired but at what terms is a huge concern.
On top of this whole matter are Bank earnings. While the earnings looked great on surface, when you delve inside, you can clearly see the amount of gains that rose from forex related gain and how much gain was from pure banking. Then you have to consider growth in pure banking numbers and then you see that there was very little growth actually.
This CBN Governor is serious about fighting issues in Nigerian banking sector which risks failure if these problems are not solved. Banking sector is a huge part of Nigerian economy and cannot be allowed to rot the way it has in the past 10 years. Going by what we have seen from this CBN Governor so far, we should expect tight control on issues that matter. Issues like endemic corruption which is self destructive at Banks at various levels.
The CBN is correct in their approach in requiring the banking sector to re-organize itself. There is are a lot of issues in the Banking sector and they are complicit in the Naira devaluations. They may not be the top drivers of devaluation but they have profited from currency devaluations and round-tripping. That kind of profit which has no growth Internationally is detrimental to the economy of a country like Nigeria. It goes not lead to GDP growth. That is not what we want as bank shareholders or as citizens.
Banks have played a role in currency scarcity as well where the general Nigerian public has been made to 'BUY" cash notes from POS operators sitting just outside banks.
The CBN started an investigation into the matter in December and its findings have not been made public yet meaning that the investigation is still on going. While that investigation is on-going, in the public domain it is generally accepted that corrupt bank managers sell cash notes to POS operators and cause a scarcity of cash notes in bank branches and force public to buy cash notes.
Our Banks spend huge amounts on their own up keep and their own expenses while they dish out paltry dividends to their shareholders. This is something you can check with the low dividend payout ratios of any bank you pick. They are totally laughable dividend payout ratios when compared with how much they spend of administration charges, salaries, foreign trips and domestic leisure.
These issues have now come up all at once and we feel that there will be further shocks to the prices and that better opportunities may open up for long term investors. This is not just about up-coming dilutions or capital raises but about the very future of the Banking sector. Are we going to rise up to be a real Banking capital in Africa or just be another spot for round-tipping transactions.
reporting for easykobo.com on Wednesday, April 24 2024 from Lagos, Nigeria
Note - Above is an opinion article from easykobo analyst. It is not to be considered as a prediction or forecast of any sort. Financial markets are complex and you should consult an expert before making any investments in stock market as you stand to possibly lose your investment.