BANK EQUITIES defy a difficult macro-economic environment

NGX

Okey Onyenweaku

The Banks (NGXBNK) sub-sector of the equity market fell 11.59 points, representing 2.83%, from 409.38 points as of January 4, 2022 to 397.79 points for the six months ended June 30, 2022.
The sub-sector stood at 407.47 points as of January 4, 2021.

The drop in the banking sector index may have something to do with the weak economy. Looking critically at bank stocks, although major stock indexes, including the Allshare index and market capitalization, are up 20.49% and 20.4% respectively in a six-month period, companies were relatively low. Over the years, the banking sub-sector of the equity market has always been the most active and liquid.

However, as since the beginning of the year, bank actions reflect the country’s macro-economic challenges. For example, Access Bank stock price fell 4.6% from N9.70 per share on Jan 4, 2022 to 9.25 on June 30, 2022. UBA stock fell 3.2 %, from N7.70 per share on January 4, 2022 to N7.45 per share on June 30, 2022.

Similarly, Zenith Bank stock fell 3.12% from N22.40 per share on Jan 4, 2022 to N21.70 per share; FBNH stock fell 4.91% from N12.20 per share to N11.60; Ecobank also lost 11.66% at N12.00 per share to N10.60; Fidelity Bank shares rose 0.29% from N3.43 per share to N3.42; GTCO stock fell -4.65% from N21.50 per share to N20.50; Jaiz Bank rose slightly by +30% from 0.70 per share to 0.91 naira per share; Sterling Bank’s share also gained +0.66% from 1.51 naira per share to 1.52 naira per share; Union Bank gained slightly +2.5 from N6.00 per share to N6.15 per share; Unity Bank increased by +2.2% from 0.44 naira per share to 0.45 naira per share; Wema Bank also gained 18.14% from N2.70 per share to N3.19 per share; Stanbic IBTC share also fell -1.7% from 34.15 Naira per share to 33.55 Naira per share and FCMB Group appreciated +1.8% from 3.30 naira per share at 3.36 naira per share.

Backtrack

The banks had suffered a huge setback in 2008/2009 and it does not seem to have been entirely overcome. To date, banks have yet to address the problem of their huge non-performing loans (NPLs) despite the activities of the Asset Management Corporation of Nigeria (AMCON) which removed over $5 trillion in bad debts of their books. Banks continue to pay AMCON fees until today.

During the last global recession in 2008, the banking system was the central protagonist and probably the one that suffered the most. As many as 465 banks closed in the United States between 2008 and 2012. Similarly, Nigerian banks suffered as a result of the 2016 recession, which eventually led to the establishment of Polaris Bank to resume operations and services. assets of Skye Bank.

This authoritative statement may be true, but industry analysts are not mistaken that this picture is not exactly the same. In fact, banks were considered sound when bank consolidation reduced the number of banks from around 90 to 25 through mergers and acquisitions when many could not meet the N25 billion capitalization requirement. .
The banking sector was seemingly strong again when Sanusi’s focus on risk management took most of them to a halt and they failed the joint CBN/NDIC stress test and became bankrupt banks.

Unfortunately, the asset management company (the bad bank) still bears the burden of over 5 trillion naira in toxic industry assets.

As a major player in the capital market, the banking sub-sector lost 69% from a high value of 4.52 billion naira on March 3, 2008 to 1.41 billion naira on February 24, 2009. Individual stock prices for each of the banks also crashed and no one knows when they would stabilize. For example, Access Bank, whose share price was N24.30, in March 2008 lost 79% or N19.22 to close at N5.08 on February 24, 2009.

For Fidelity Bank, each shareholder lost N8.9 or 75.2% on shares which sold at N11.94 and fell to N2.96 during the reporting period. First Bank lost 66% or N33.01 in 11 months while GT Bank Plc was down 72.5% representing a loss of N26.84.

Ever since 2008, when stocks soared to all-time highs before the global economy and markets crashed, market participants have remembered that boom time with nostalgia.

But market watchers point out that it was a different time and period that wasn’t even sustainable.

While some people took a kill (smiles at the banks) at that time, others lost everything they had when the reverse (stock market crash) happened.
In the following years, stocks, and not just bank stocks, were rarely able to recover or reach such unprecedented prices again. And analysts say that such a boom period happens once every ten years. In 2013, 2017, and 2020, the stock market rose sharply to 47.19%, 42.30%, and 50.03% respectively. Around this time, bank stocks also rose significantly, but not as bullish as during the boom of 2007/2008.
Challenges

Analysts believe that the general weakness of the economy in Nigeria is not favorable to any sector. Especially the banking sector which suffered a serious setback due to high non-performing loans, a difficult macroeconomic environment and stricter regulation by the CBN.

Moreover, apart from the apprehension of the market, foreign investors have also withdrawn a substantial part of their funds from the market for fear of greater losses. Many observers believe there is huge uncertainty in the air given the upcoming 2023 elections. the crisis in the economy to be the major challenge of the market.

Other challenges are diminished access to foreign exchange, defaults on loans and diminishing profits with threats of insolvency. The CBN’s low interest rate regime, although recently adjusted down to 13%, is also not healthy for banks as reduced revenues and low profitability have followed. These dislocations have not only forced banks to close some of their branches in the far north of Nigeria, but travel is now restricted as bank workers and customers fear for their lives.

The price of crude, although currently high at over $100 a barrel, continues to fluctuate, falling incomes, high unemployment and biting poverty have all conspired to keep the economy down and by extension , the banks.

Just recently, Fitch Ratings warned that the operating environment for banks in Nigeria could deteriorate in 2022-2023 given the adverse global economic conditions impacting the local economy. There are serious pressures on banks’ profitability and asset quality, the report notes.

Banks further suffer from ethical and professionalism challenges, poor corporate governance practices, dependence on public sector funds, slow GDP growth and
also operational and regulatory issues.

The fear of many

The Nigerian economy is in dire straits. About 40% (80-100 million) of Nigerians live in extreme poverty; food production is expected to decline due to fertilizer shortages due to the Russian-Ukrainian war; Nigeria has also not fully recovered from the devastating impact of Covid-19; growing insecurity that has hampered agricultural activities weighs differently on Nigeria’s food security; food inflation according to the BNS was around 18%; a deficit of more than 6 trillion naira weighs on the 17 trillion naira budget for 2022 and most of the debt service will also come from this money; the value of the naira continues to fall and the country remains unproductive; the unemployment and underemployment rates were 33% and 22% respectively.

The country’s total direct remittances fell; FG is targeting a total debt stock of around N46.63 trillion which it manages with around 95% of its revenue. And the most problematic is the political instability in the country.

This scary scenario is not conducive to growth in the stock market, as market participants are used to being lethargic with their investments. But that’s far from being the case lately.

In the absence of an eleventh-hour miracle, when an assessment of the performance of the executive branch of government will be carried out on May 29 next year, using the economy, security and corruption as an index, the President Muhammadu Buhari could probably become a failed president. .

If this happened, the legislative branch of government should largely be blamed. First, for failing to invoke the doctrine of checks and balances to ensure that the President fulfills his statutory obligations in accordance with the national interest and aspirations.

Second, for failing to stop the president’s violation of the principle of federal character. Thirdly, for not having questioned the executive on the decline in economic indices, the worsening of corruption, the rise of insecurity, the flight of capital, the increase in loans, the multiple tax burden, unemployment and infrastructure decay, including poor electricity and education”—Dr. Michael Owhoko’s, an author and editor said.

There is a consensus that the market is naturally volatile. It can go up or down depending on what propels or dampens it. But many believe that the economy still lacks a clearly defined growth model to be able to drive the market to meaningful levels. Bank stocks are not excluded.

Market performance over the past 20 years
+65% in 2003;
+18.5% in 2004;
+1.01% in 2005;
+37.80% in 2006
+74.73% in 2007.
-45.77% in 2008
-33.80% in 2009
+18.50% in 2010.
-17% in 2011,
– 35.4% in 2012,
+47.19% in 2013,
-16.14% in 2014
-17.36% in 2015
-6.% in 2016
+42.30% in 2017,
-17.81% in 2018
-14.6% in 2019
+50.03% in 2020
+6.07% in 2021
+20% in July 2022
BH/Cordros Analysts