Renaissance Capital Group; a global independent finance and investment group that specialise in high opportunity emerging markets, has released a study report on “Nigerian Banks: Eyes On The Prize.”
In the report, the coverage of the Nigerian banking universe is extended to nine initiations. It covers 11 Nigerian banks, rounding-out its coverage of the Nigerian financials space after having recently initiated on the 10 most liquid insurers.
The report coverage is as follows:
Capital headwinds. Nigerian banks have had a challenging 1H08 on the back of the excesses of 2007, which saw the sector raise NGN1,282bn (approximately $11bn) in a mix of domestic and international offerings. With bank equity-to-asset ratios elevated, leaving concerns over RoAE pressure and potential misallocation dominate the market.
Retail play misunderstood. Nigerian banks are not a play on retail lending, but retail deposits. Capital raisings were initiated to improve the cost of funding and maintain bank liquidity ratios, not to open up the retail lending market in the near term.
Asset growth overlooked. Asset growth over the next five years (47% pa) should bring equity-to-asset ratios down to 2006 levels (13%) by 2009 and reduce them further to 8% by 2012; this should support the recovery in RoAEs.
RoAAs expanding. With earnings growth (52% pa) expected to exceed asset growth over the next five years, it is estimated that RoAAs (for the universe of 11 banks) should improve to 2.84% by 2012; 36 bpts higher than 2006 levels (2.48%).
Valuations attractive. With the RoAE of the RC NG Bk-11 expected to recover to 32% by 2012, it values the universe of stocks at 3.31x 2008E P/B, a 20% premium to current valuations.
Keeping eyes on the prize. In addition to the strong macroeconomic fundamentals that should support long-term asset growth, it is believed that investors should not lose sight of the prize that is Nigerian demographics; 43% of Nigerians are less than 15 years old and Nigeria will be the worlds fourth largest country (by population) in 2050
The top picks. Within the RC NG Bk-11, the top picks are UBA, Zenith and Access Bank; the expected total returns on these names are 57%, 55% and 52%, respectively.