Lucky Fiakpa writes that the banks that investors fell heads over heels to buy their shares during the banking consolidation exercise are today selling for less than the price of pure water and an investor can now acquire them with ease.
Naira sign
No one would have thought the shares of United Bank for Africa, UBA, First Bank, Union Bank, Zenith Bank, Guaranty Trust Bank, Intercontinental Bank, Bank PHB, Oceanic Bank and some of the elite banks in the country that so many people struggled hard to buy during their various public offers can be selling for peanuts in the market today.
These were some of the banks that investors fell heads over heels to buy their shares during the banking consolidation exercise. It even got to a point where millions of naira invested in buying some of the shares were returned to the investors with or without interest as a result of over subscription. Today for less than the price of pure water, an investor can acquire the shares of some of these elite banks with ease. How are the mighty fallen!
But rather than panic and be scared of the market, this seems to be the time the seasoned individual investor who has done his home work should move in and increase his holding of some of the best banks in the country. This is the time the seasoned investor should take the opportunity to buy that elite bank shares he could not buy during the banking consolidation due to its high price or limited quantity.
Taking the Opportunity Goldman Sachs hit a 52 week high on October 31, 2007 at $250.70 per share. On September 18, 2008 the share had dropped to $86.31 due to market volatility. Goldman Sachs as an Investment Bank was not affected by the mortgage backed security instruments crisis in the US markets. Goldman had sold all its mortgage backed securities more than six months before other holders of the instruments realized that they were holding contaminated or toxic instruments that may be worth less than face value.
On Monday, September 22, 2008, the US Treasury and market regulatory authorities granted Goldman Sachs and Morgan Stanley, the two investment bank survivors of the current market carnage in the country rights to become bank holding companies. Within hours of the announcement, Warren Buffet, the world’s most successful investor, pumped in $10 billion dollars into Goldman Sachs ($5 billion in preferred stocks and $5 billion in warrants to acquire ordinary shares within five years at $115 per share).
Few days before the Goldman deal, Warren Buffet struck a deal and paid $4.5 billion to acquire Constellation Energy, one of the largest suppliers of electricity and fossil fuels in North Eastern United States. On January 8, 2008, Constellation’s market capitalization was $19.25 billion. Its share price on this date was $197.97, but had fallen to $13.00 on September 16, 2008.
Constellation Energy was founded in Baltimore, Maryland in 1906. On October 2, 2008, sensing unparalleled opportunity in the banking industry, Wells Fargo & Company bid $15 billion to acquire Wachovia Bank, offering to acquire the bank with its own stocks and cash without Federal Deposit Insurance Corporation, FDIC, assistance (the US Bank regulator and customers deposit insurer). Berkshire Hathaway, Inc., (Warren Buffet’s investment vehicle) own nine percent of Wells Fargo and is the bank’s largest institutional investor.
The long term investor has a lot to learn from the conduct of Wells Fargo & Company. It saw an opportunity in the acquisition of Wachovia Bank. Citigroup and Wachovia had already reached a deal few days earlier with the assistance and express support of the FDIC.
Wells Fargo took the calculated risk of being sued for interfering in contractual rights by Citigroup and made an offer to acquire Wachovia at a higher price rather than sit on the side lines and allow the acquisition by a rival bank. (Citigroup has since slammed Wells Fargo with a $60 billion lawsuit). Whoever acquires Wachovia will emerge as the largest commercial bank in the United States with more than $1.4 trillion in customer deposits.
On September 29, 2008 when Citigroup bid to acquire Wachovia Bank, the company’s share had dropped to $0.75 with a market capitalization of $150 million. Wachovia’s 52 week high was $52.25 per share reached on October 5, 2007 with market capitalization of $112 billion. October 2, 2008 saw Mr. Buffet inking another deal. He put up $3 billion to acquire GE preferred stocks that will return 10 percent with another $3 billion in warrants for ordinary shares of GE.
Taking a queue from investors and leading corporations who use market volatilities to solidify their hold in the market place and increase their market or industry positions, the individual investor should always strive to understand the working of the market. Unquestionably, Warren Buffet is betting that Goldman Sachs with the new authority to become a bank holding company will use its intellectual properties and abilities to understand global banking to acquire regional banks in the US and increase shareholder returns.
The Nigerian Market Eze Nwagbaraji, a US based lawyer and investment banker, wrote recently that volatile markets are the individual investor’s best openings to increase wealth.
The individual investor who is investing for retirement year responsibilities, he stated, should never be bogged down by seasonal shifts in market sentiments. “What happened in the United States in the last 10 days of September 2008 represented a rare opportunity for an individual investor to move in and increase his holding of some of the best corporations on earth,” he noted.
This very much represents the situation in Nigeria at the moment. Leading Nigerian banks and corporations are trading at a fraction of their 52 week highs. A volatile market creates unpredictable environment for the casual market participant. “There are many casual market participants in the market. As several of them rushed to get out of the gate in the market, the seasoned individual investor who has done his home work sees an opportunity to enter the market with relative ease,” he further said.
There is nothing wrong with UBA, Intercontinental Bank, Zenith Bank, Oceanic Bank, First Bank or any of the elite banks in Nigeria. Indeed, it had been said severally by the market authorities that the fundamentals of the market are still very strong. The banks are still reporting mouth-watering profits and paying handsome dividend, capped with generous bonus offers.
UBA, the biggest bank in the West African sub-region in terms of branch network and assets, last week Wednesday had its stock traded at N19.26 per share, down from its 52 weeks high of N63.94 per share, a drop of N44.68 per share.
Zenith Bank apart from reporting very impressive result this year, is promising a record dividend of N1.70 per share yet as at last Wednesday, the share price was just N27.71 each, down from 52 weeks high of N51.15 per share, a drop of N23.44 per share.
Afribank Plc also had an impressive performance in the 2007/2008 financial year. Gross earnings increased by N21.65 billion, from N27.54 billion in the year ending March 31, 2007, to N49.19 billion in the year under review, representing an increase of 79 per cent. On this basis, profit before tax in the review period stood at N15.12 billion, an increase of 107 per cent on the N7.29 billion recorded in the corresponding period of the previous year.
The bank posted an after tax profit of N10.03 billion during the year as against N5.20 billion recorded the previous year, an increase of 93 per cent. It was on the basis of this that the shareholders approved a dividend of N5.06 billion which translated to 50 kobo per share and a bonus issue of one for every three ordinary shares held was also approved by the shareholders.
The bank’s total assets closed at N352.27 billion, representing an increase of 88 per cent over N187.08 billion posted in the corresponding period of the previous year. Total deposit rose by N82.34 billion, up 61 per cent from N135.64 billion in the year ended March 2007 to N217.98 billion in the review period. The improvement seen in the topline equally reflected in the overall positive performance of the bank.
Even with this, bank’s stock as at last week sold for N17.14 per share from a peak of N31.60, down N14.46 per share.
In spite of all the vulnerabilities associated with the operating environment in the last financial year, First Bank of Nigeria, Plc, (FBN), another elite bank in the country, was still able to post an impressive result. Gross earnings increased by N64.13 billion, from N91.16 billion in the year ending March 31, 2007, to N155.29 billion in the year under review, representing an increase of 70 per cent. On this basis, profit before tax in the review period stood at N47.69 billion, an increase of 84 per cent on the N25.85 billion recorded in the corresponding period of the previous year.
The bank posted an after tax profit of N36.54 billion during the year as against N20.64 billion recorded the previous year, an increase of 77 per cent. It was on the basis of this that the board proposed a dividend of N1.20 per share which was approved by the shareholders during the AGM in Abuja. And in line with the bank’s commitment to grow shareholders’ value, a bonus issue of one for every four ordinary shares held was also recommended by the board and was equally approved by the shareholders.
The bank’s total assets and contingents closed at N2.08 trillion, representing an increase of 66 per cent over N1.25 billion posted in the corresponding period of the previous year. Even at this, the bank’s share price traded for N22.26 per share down from its 52 weeks high of N54.86, a drop of N32.60.
At the last annual general meeting of Oceanic Bank International Plc in Abuja, the managing director and chief executive officer, Dr. (Mrs.) Cecilia Ibru, told shareholders that the bank would not rest on its oars in its resolve to break new ground in the on-going efforts to build a stronger Nigeria. The managing director went further to assure investors of bumper returns at the end of the 2008 financial year.
The fourth quarter result of the bank just made public passed as a fulfillment of that promise. Oceanic Bank recorded significant growth in all performance indicators for the year ended September 30 2008 with gross earnings hitting N150.9 billion, thus confirming its leading position in the Nigerian banking industry. According to the bank’s un-audited results recently approved by the Nigerian Stock Exchange (NSE), gross earnings grew by 101 per cent compared to N74.94 billion recorded in the corresponding period in 2007.
Profit before tax (PBT) also grew sharply by 127 per cent to N52.23 billion in contrast to N23.01 billion posted at the preceding year. In like manner, the bank’s profit after tax (PAT) increased significantly by 135 per cent to N41.24 billion when compared to N17.54 billion posted in 2007. A total of N11 billion was paid as tax to the government indicating an increase of 101 percent over N5.47 billion paid the previous year. All of that notwithstanding, the bank’s share sold for N15.17 per share last week from a peak of N39.05, down N23.88 per share.
Only last week, Union Bank made public its financial statement. It was also a success story. The bank recorded gross earnings increased N23.75 billion, from N89.24 billion in the year ending March 31, 2007, to N112.99 billion in the year under review. On this basis, profit before tax in the review period stood at N33.01 billion, an increase of N15.43 billion over N17.58 billion recorded in the corresponding period of the previous year.
The bank posted an after tax profit of N26.85 billion during the year as against N13.88 billion recorded the previous year, an increase of N12.97 billion. Apart from proposing a very attractive dividend to shareholders, the bank is also proposing a bonus of one new ordinary share of 50 kobo each for every six ordinary shares of 50 kobo each fully paid and registered in the names of such shareholders at the close of business on November 14, 2008. The bank’s total assets closed at N1.13 trillion, up from N700.09 billion posted in the 2007 financial year.
This outstanding performance notwithstanding, the bank stock, which was recently let off from a technical suspension when it earlier gave its intention to float a public offer, sold for N33 per share from a height of N45.09, down by N12.09 per share.
Against this backdrop, therefore, Mr. Arnold Ekpe, the group managing director of the Ecobank Transnational Incorporated told Financial Vanguard in an interview in China, during the ECOWAS-China Economic Forum that the best time to buy into some of the banks cannot be better than now. “Isn’t it the best time to buy when the price is down? You want to buy when the price is high? The market is not going to be down forever. If you wait for the market to go up you’ll lose your chance. This is the time to buy,” he said.
These banks downwards share price movement is without significant shifts in their operational and market fundamentals. In the thinking of Nwagbaraji, if any of these banks constitute part of an investor’s core holding in his portfolio, “it will be full hardy to shun an opportunity to add to your holding”.
As a long term investor, Nwagbaraji further said, “the individual investor should be fully aware of the cost of each share. Dividend payment should be measured as a percentage of the stock price. If a share is acquired at N50.00 and the annual dividend is two percent, it makes good investment sense to increase the number of shares held if the share price declines to N30.00 unless there are changes in the corporation’s underlying fundamentals.
Implication of the Meltdown The only fear expressed by the managing director and Chief Executive Officer of Union Bank of Nigeria Plc, Dr. Barth Ebong, was that the on-going global financial meltdown could have implications for some Nigerian banks.
As global players, which most Nigerian banks are, he said, what is happening in the global arena could possibly affect them. “Credit is becoming expensive than they were before the global financial crisis. The era of LIBOR + 1 and so on is gone. To that extent, for Nigerian banks that would depend on such loans for business would suffer some set back in their businesses,” Ebong stated.
The implication is that Nigerian banks which had easy access to international credit a couple of months, or a year ago, will find it more difficult to get credit from international banks. Banks overseas that, on the surface, look healthy have every reason to be fearful after seeing venerable institutions like Bear Stearns, Lehman Brothers, Meryl Lynch, HBOS and Fortis close shop in the maelstrom that has hit global financial system.
Ebong however excluded Union Bank from the list of banks depending on foreign credits to do business. “We are strong, dependable and reliable. We always have enough money for our business. That is why we will not be affected by the global financial crisis,” he said.
Generally, he said, subsidiaries of Nigerian banks abroad could be affected somehow “but not as much as the domestic banks in those countries,” he stated.
While he said he could speak for other banks, he however noted that Union Bank, UK was not involved in the type of business that the domestic banks in those countries were involved in. “We were not involved in the sub-prime business, which was really the cause of the whole crisis. We were still operating in our conservative banking culture,” he said.
The post-consolidation period has exposed a lot of Nigerian banks to global practices. Not only did many entered into business relationships with some of the foreign banks that are badly affected by the crisis, a good number of them were reported to have booked considerable credits from such embattled financial institutions.
At the end of each financial year, some banks often access foreign credits to balance their books and since interest on such facilities are quite low, it makes sense for them to do so. But with the credit crunch and the prevailing relative high cost of funds abroad, where you get one, this may now be an expensive gambit.
Besides, other than Nigerian banks having limited access to international credit, all the big players from First Bank to GTBank may be exposed to the crisis overseas through their subsidiaries, albeit to a lesser extent. A former executive of GTBank was recently reported to have privately admitted that the value of the bank’s Global Depository Receipts listed on the London Stock Exchange have been halved in the last few weeks. The same could have happened to UBA’s GDR on the New York Stock Exchange.
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