By Peter Egwuatu & Nkiru Nnnorom
AS the impressive performance of the Nigerian Stock Exchange, NSE, came to a halt last week, with investors losing N463 billion, market analysts have warned that speculation in penny stocks with weak fundamentals, could lead to meltdown of the market.
In a week dominated by profit taking, investors lost N463 billion worth of their investment in five days trading on the NSE as market value of all shares (market capitalisation) fell by 2.9 percent to N15.692 trillion last week Friday from N16.154 trillion the previous week.
In the same manner, another major market indicator, the Nigerian Stock Exchange, NSE All Share Index declined by 2.9 percent or 1,319.07 points to close last week Friday at 43,773.76 points from 45,092.83 points it closed penultimate week.
Financial Vanguard had exclusively reported the previous week that the rally in the NSE in the first three weeks of the year, which saw market capitalisation soaring to historic high of N16. 35 trillion, was dominated by low priced stocks (penny stocks) led by shares of tier-2 and Tier-3 banks, namely Skye Bank, Unity Bank, Diamond Bank, FCMB and Wema Bank.
Investigation, however, revealed that in spite of the downturn in market performance last week, investors’ appetite for these shares persisted. During the week, investors bought 342.99 million shares of Skye Bank valued at N478.9 million; 345.1 million shares of FCMB valued at N1.1 billion; 137.4 million shares of Unity Bank valued at N180.8 million; 284.8 million shares of Diamond Bank valued at N842 million; and 138.1 million shares of Wema Bank valued at N168.9 million.
According to the NSE weekly report, FCMB and Skye Bank emerged as two of the three most traded stocks last week, which accounted 66.86 percent and 26.66 percent to the total equity turnover volume and value respectively.
Analysts who spoke to Financial Vanguard warned that the demand for these penny stocks is not driven by fundamentals of the companies but by speculation, bandwagon effect, and rumours of hostile take-over. They also warned that this could trigger a melt down or market burst, when it becomes difficult for investors to exit these shares.
Indication to this emerged last week, as four of the tier-2 banks suffered decline in their share prices, indicating supply glut for their shares in the market.
FCMB fell by 43kobo or 12.3 percent to close at N3.06 per share last week from N3.49 kobo per share the previous week while Diamond Bank also fell by 93kobo or 26.1 percent to close at N2.64 per share from N3.57 per share. Wema Bank lost 3 kobo or 2.6 percent to close at N1.14 per share from N1.17 per share the previous week, while Skye Bank fell by 1 kobo or 0.8 percent to close at N1.28 per share from N1.29 per share.
Market operators and analysts reactions
Executive Vice Chairman, High Cap Securities Limited, Mr. David Adonri, said: “The small capitalised stocks rally carried those banking stocks along notwithstanding their poor fundamentals. It is also possible that hostile takeover is brewing up in those stocks. Just like you mentioned, we don’t know those behind the mopping of these stocks. The rally is now over and those stocks have reversed to illiquidity.”
Reacting, Managing Director, APT Securities & Funds Limited, Mallam Kasimu Kurfi, said: “Most of the buyers that pushed the price up are our local investors who don’t analyse stocks to patronise. They just go for any stock they can afford to buy without looking at their fundamentals. That is why they lost heavily as the rally came down. These categories of investors are always ready to follow the bandwagon.
In his own view, Dolapo Ashiru, Managing Director/CEO, Mega Capital Securities Limited, said: “Investors are simply looking for opportunity in those banks because they have already had enough of GT Bank, Zenith Bank and Access Bank. So, they are trying to look at low priced stocks. Right now, the share prices of these banks are all going down very fast; people are dumping them now (in the ensuing profit taking).
“There is a speculation that some foreign investors may be in talk with Skye Bank with a bid to take over the bank. (Nothing concrete). What is happening is that a lot of people are pulling their money out of Treasury bill because the rates are coming down and pumping into equities.
Concentrating on smaller banks
So, there is a lot of money in equities; people have already invested a lot in Tier-1 banks. So, from there, they are moving to Tier-2 banks and then the low capitalised stocks. They are just looking for value in banking stocks. Investors have already taken GT Bank’s shares to about N50; they have taken Zenith Bank to over N30. So, right now, they are concentrating on smaller banks, but last week there has been a lot of profit taking, they are all moving out again.
“Also, many people are taking position in those banks with the expectation that they will deliver good results. It is just expectation. He said that companies like Meyer Plc, A.G Leventis are just benefiting from the speculation. A a lot of stocks have been undervalued; people are seeing value, potential in those stocks and they are buying them.”
Corroborating, Stockbroker and Chief Relationship Officer at Foresight Securities Limited, Charles Fakrogha said: “There are speculations that there are foreign investors who are interested in the banks, especially Skye Bank, that is why you are seeing huge volumes exchanging hands in the bank, although the share price is cheap. And you also recall that Skye Bank has been in that N0.50 for a long time and a lot of people just wanted to sell-off.
“Now, our economy has been projected to grow further by the World Bank, International Monetary Fund, IMF, and Fitch Rating. So, this time those investors are looking for where to invest and Skye Bank is very cheap. Our forex window is a bit stable; IMF and World Bank are projecting positive growth for Nigeria and so it is a good buy.
That is why you saw a lot of foreign investors pumping money into stocks. (Whether they are in discussion with Nigeria authorities to buy Skye Bank, I wouldn’t say, but from the market, we saw large and unusual volume. But the factors are there.
It is cheap and foreign investors want to take advantage. Also consider people who have been keeping these shares for a very long time. So, they were happy and that was why you saw all of them were ready to sell. The buyers were foreigners and they were buying.
“You need to wait for fundamentals. You project that a particular stock will go this way based on certain assumptions. That was what happened. Some domestic investors also took advantage to buy.
“The rumour of hostile takeover generally applies to all the three banks – Wema Bank, Unity Bank and Skye Bank, but the rumour was more on Skye Bank. GT Bank, Zenith and other big names are all up and there is a rush to get the Tier-1 bank, but since investors could not get them, they decided to make do with the alternatives. That could also drag the prices of similar companies in other sectors up. Fidelity Bank is cheap, Sterling Bank is cheap, you can see the trend. You can also have that kind of effect.”
In his part, Johnson Chukwu, Managing Director/CEO, Cowry Asset Management Limited, said: “People are simply looking for shares. Their prices jumped up because people were looking for penny stocks. It is just market sentiment.”
Reacting as well, Jude Fejokwu, an analyst at Dialectic Analyst,said : “Most stocks are rising on momentum and not because of improved financial performances and near-term expectations.
The banking industry takes the brunt of bulls and bears. I will mention (briefly) three banks to be wary of when the tide turns and stocks start heading south as investors panic and seek for the exit trying to hold on to their unrealized gains.
The banks include FCMB- the bank’s nine-month (September 2017) result is not on the NSE’s corporate disclosures page. Not surprising given that pre-tax income declined by 52% year-on-year and Gross Earnings declined by 16% year-on-year. To put this result further into perspective, pre-tax income was N7.57 billion in April 2007 (12-month result) and ten years later now operating as a holding company, nine-month pre-tax income in September 2017 is N 6.84 billion despite interest income being approximately seven times larger in September 2017 compared to April 2007.
“Skye Bank- no 2016 fiscal year result has been released while 2017 fiscal year results are about a month away for release of every other banks’ results. No news is not good news. Remember when Oando delayed its result for almost a year?
“Stanbic IBTC- This is a holding company that incorporates the largest asset management company in Nigeria. Nonetheless, this bank’s gross earnings and assets are less than that of Diamond Bank while trading 12.5X higher per share. Almost the entire free float is under the control of this asset management behemoth to dictate price movement as and when necessary. Interest expense and credit impairment continues to be understated giving a big artificial boost to profit.”
In its reaction, former National Secretary, Nigerian Shareholders Solidarity Association, NSSA, Alhaji Gbadebo Olatokunbo, said: “It might be that the stocks were really unvalued, due to their current prices at NSE, which weren’t known to many of us. The recession might have affected the price movements of these shares and due to some diligence studies of the banks’ plans and some moves to improve on their standards and other things, while some business-experts might have undertaken serious studies on the banks, which weren’t public knowledge yet.
On the issue of likely merger, it’s really a sign of good things to come, since there were rumours that some banks might be forced to merge by the CBN, due to situation in the banking Industry. Experts might be taking positions, in-advance of whatever decision the CBN arrives at with the banks, but l don’t think there is cause for alarm on the three banks, because the boards and managements are not asleep on their responsibilities.”
National Co-ordinator of Independent Shareholders Association of Nigeria (ISAN), Mr. Adeniyi A. Adebisi, said: “The stock market boom is alarming and there is need to checkmate it. The nation’s economic managers need to monitor the economy closely.”