Is it time to go long financials?

by | September 26, 2016 12:03 pm

What’s the best performing sector in the Nigerian Stock Exchange (NSE) this year?

The unlikely answer is the financials.

The NSE banking index is up 5.48 percent year to date (Sept. 16), outperforming sectors such as industrials (-15.94%), Oil and gas (-12.66%), consumer goods (-0.46%) and the broad NSE all share index (-2.74%), in the same period, according to data from the stock exchange.

Individual ytd stock performances for the financials are also more impressive.

Four of the five tier one bank stocks UBA, GTB, Zenith and Access Bank have risen 27.22 percent, 42.08 percent, 12.38 percent and 15 percent respectively this year.

FBN Holdings is the only laggard falling -40.55 percent in the period.

To be fair financials are rallying off a low base after severe selloffs in the past two years.

Access Bank and UBA are currently trading at about half the price they were at in September 2014, GTB and Zenith bank have gone nowhere in that time, while FBNH has lost about 78 percent of its value in that time period.

FBN Holdings is a particularly interesting bank stock.

It has the largest asset base of any Nigerian bank (N4.8 trillion) as at Half Year 2016, but sports the lowest valuation among the big 5 (see figure 1).

This suggests a mismatch and perhaps an opportunity for investors who believe the turnaround story being sold by Adesola Adeduntan, chief executive officer of FBN Holdings’s main First Bank of Nigeria unit, the biggest contributor to profits.

FBNH trades at 0.2 times tangible book value per share, or the theoretical price that shareholders would get if all assets were sold and liabilities paid-off.

That compares with 1.6 times for GTB, Nigeria’s largest bank by market capitalisation.

The stock seems to have bottomed at the N3 per share mark and may be consolidating, although only a move above the 100 and 200 day moving averages (overhead resistance) would confirm a definite break out.

Investors reacting to negative headlines about Nigerian financials (Treasury single account TSA, bad loan surge, lay-offs, etc), may be ignoring the underlying bullish message these stocks are telling.

Bottom-line: Nigerian bank stocks are in stealth rally mode despite the negative sentiment surrounding the names.