Banks’ YTD poor returns unsettle operators

.Stockbrokers blame unfriendly policies, uptick in fixed market yield

With the 33 per cent Year-To-Date rise in the All-Share index, operators have bemoaned the negative 12 per cent return on investment recorded by the banking sector, ranking it as the worst performing on the nation’s bourse presently.

According to the operators, the banking sector, which achieved an impressive full-year 2023 growth of 114.9 per cent, reflecting investor confidence and increased appetite for banks’ stocks, has emerged as the worst-performing at the close of transactions last week.

The banking equities’ poor return may not be unconnected to the market’s unfriendly requirements for the banking recapitalisation exercise rolled out by the Central Bank of Nigeria, restraining banks from paying out huge dividends commensurate with their earnings, which several investors were targeting when they rushed to the sector.

This, is in addition to the earlier directive that banks should not utilise the foreign exchange (FX) revaluation gains realised from the 60 per cent devaluation of the naira to pay dividends or for other operational expenses.

While other segments already outperformed or are closer to achieving the 33 per cent index figure, the banking index underperformed the index with -12.07 per cent.

This is despite the significant improvement recorded by the tier-1 banks as most of them reported above N1 trillion in market capitalisation, coupled with huge foreign exchange gains made from asset revaluation.

Data obtained from the Nigerian Exchange Limited (NGX) showed that the NGX industrial goods index has recorded YTD return of 72.8 per cent gain to investors while the consumer index rose by 41.7 per cent. The oil and gas index and insurance index improved by 23.8 per cent and 18.6 per cent. The NGX index has also recorded a 33.1 per cent gain as at the close of trading last week.

The banking sector had been the toast of investors over the years, even in an increasingly uncertain macroeconomic environment. For instance, the banking index recorded a leap in 2023, with an increase of 114.9 per cent or 479.7 basis points, closing the trading year at 897.20 index points, higher than 417.50 at which it opened for transactions in January 2023.

A cursory look at the full year 2023 performance of the banks showed that GTCO, UBA, Zenith Bank and Access Holdings posted a total profit after tax (PAT) of N2.44 trillion in 2023, representing a 241.5 per cent rise when compared with N715.6 billion recorded in the corresponding period in 2022.

The four banks also achieved a combined gross earnings of N7.99 trillion gross earnings, a figure that is 248 per cent higher than their 2022 performance.
Head, Equity, Planet Capital, Dr Paul Uzum said although the banking sector remained the liquid segment of the market where people keep the bulk of their investment, FPIs who invested in equities (mainly banks) when the exchange rate was N1,600, have stopped buying while other FPIs, who were trapped in Nigeria are selling to cash out of Nigeria given the improvement in exchange rate.

“The rise in interest rate is affecting the market as people are selling stocks to place in Treasury bills and commercial papers. Secondly, banks like GTCO disappointed in their dividend payment; dividend fell, making investors sell the stock,” he added.

Vice President of Highcap Securities, David Adonri, said the negative YTD return on the banking sector index is surprising because the fundamentals of banks grew astronomically from the third quarter of last year due to the forex windfall they enjoyed from floating of the Naira.

“However, the enthusiasm by investors became dampened when market unfriendly requirements for banking recapitalisation exercise were rolled out by CBN.

“Salt was added to this injury when the CBN again restrained banks from paying out huge dividends commensurate with their earnings which several investors were targeting when they rushed to the sector.

“Market correction is now taking place to align the prices of bank stocks to their dividend yield. After mark down, stability is expected to prevail in the sector.”