Photo by André Silvestre
If you’ve ever taken a look at the stocks listed on an African market, you likely noticed that they tend to be dominated by banks. Quite often, banks are the exchange’s largest, most liquid shares.
There’s a lot of number-crunching to be done when deciding which bank to buy. You could spend days buried in balance sheets if you cared to.
It’s for this reason that I spend considerable time coming up with quick and easy ways to evaluate the relative attractiveness of bank stocks.
The method I walk through here scores banks in five key areas: profitability, growth, asset quality, value, and dividend yield.
Please note that this method is only the first stage of analysis. It’s intended to separate the contenders from the pretenders – not to provide me with a buy decision.
With that said, let’s put it to work on 12 of the Nigerian Stock Exchange’s biggest banks. Let the showdown begin!
1. Profitability
If you’re in the market for a bank stock, chances are you’d prefer one that actually makes money. So, I took the liberty of screening out all the banks that failed to produce a positive average return on assets (ROA) over the past five years.
ROA measures how effectively management deploys the assets under its control. I’ve calculated ROA as after-tax profits from continuing operations divided by average assets. Then, because bank earnings can be inconsistent, I averaged the ROA from the most recent five fiscal years.
To calculate a score, I divided the range between the most profitable bank and the least profitable one into deciles. The banks with ROAs in the highest decile were awarded 10 points. Those in the lowest decile scored just one point.
Here’s how they stacked up:
| Bank | Return on Assets (5-Year Average) | Score |
|---|---|---|
| Guaranty Trust Bank (GUARANTY.NL) | 2.04% | 10 |
| Stanbic IBTC Bank (IBTCCB.NL) | 1.75% | 9 |
| Zenith Bank (ZENITHBA.NL) | 1.33% | 7 |
| First Bank of Nigeria (FIRSTBAN.NL) | 1.27% | 7 |
| Access Bank (ACCESS.NL) | 0.85% | 5 |
| Fidelity Bank (FIDELITY.NL) | 0.83% | 5 |
| Skye Bank (SKYEBANK.NL) | 0.82% | 4 |
| Ecobank Transnational (ETI.NL) | 0.81% | 4 |
| First City Monument Bank (FCMB.NL) | 0.61% | 3 |
| United Bank for Africa (UBA.NL) | 0.57% | 3 |
| Sterling Bank (STERLNBA.NL) | 0.57% | 3 |
| Diamond Bank (DIAMONDB.NL) | 0.01% | 1 |
2. Growth
Profitability is great, but Africa’s best banks are constantly growing their assets. They’re tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.
To measure which banks are growing the fastest, I simply annualized the growth of each bank’s total assets over the most recent five fiscal years.
Here’s what I found:
| Bank | Asset Growth (5-Year Annualized) | Score |
|---|---|---|
| Access Bank (ACCESS.NL) | 40.18% | 10 |
| Ecobank Transnational (ETI.NL) | 37.41% | 9 |
| Skye Bank (SKYEBANK.NL) | 33.74% | 8 |
| Sterling Bank (STERLNBA.NL) | 33.25% | 8 |
| Fidelity Bank (FIDELITY.NL) | 31.20% | 7 |
| Stanbic IBTC Bank (IBTCCB.NL) | 29.79% | 6 |
| Guaranty Trust Bank (GUARANTY.NL) | 28.63% | 6 |
| First Bank of Nigeria (FIRSTBAN.NL) | 27.03% | 5 |
| Zenith Bank (ZENITHBA.NL) | 27.03% | 5 |
| Diamond Bank (DIAMONDB.NL) | 22.44% | 3 |
| First City Monument Bank (FCMB.NL) | 19.41% | 2 |
| United Bank for Africa (UBA.NL) | 16.18% | 1 |
3. Asset Quality
A bank’s challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather uncreditworthy customers. When these customers default, the loans must be written down to zero – a bad thing for profitability AND growth.
One of my favorite ways to measure a bank’s asset quality is to determine how much of the loan portfolio isn’t performing as planned. I do this by dividing non-performing loans by total loans. A lower ratio implies a lower degree of risk in the bank’s loan book.
Look here to see which banks are Nigeria’s most conservative lenders:
| Bank | Non-Performing Loans/Total Loans | Score |
|---|---|---|
| First Bank of Nigeria (FIRSTBAN.NL) | 2.63% | 10 |
| First City Monument Bank (FCMB.NL) | 3.00% | 10 |
| Guaranty Trust Bank (GUARANTY.NL) | 3.73% | 9 |
| Zenith Bank (ZENITHBA.NL) | 3.99% | 9 |
| Sterling Bank (STERLNBA.NL) | 4.80% | 8 |
| Ecobank Transnational (ETI.NL) | 5.47% | 8 |
| Skye Bank (SKYEBANK.NL) | 6.39% | 7 |
| United Bank for Africa (UBA.NL) | 6.64% | 7 |
| Stanbic IBTC Bank (IBTCCB.NL) | 7.00% | 6 |
| Access Bank (ACCESS.NL) | 9.52% | 4 |
| Diamond Bank (DIAMONDB.NL) | 10.95% | 3 |
| Fidelity Bank (FIDELITY.NL) | 13.28% | 1 |
4. Value
Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Nigeria can end up losing you money if the price you pay for it is too dear.
When evaluating bank stocks, I take a close look at price/book ratios. Book value is simply the difference between a bank’s assets and its liabilities. Stocks with low price/book ratios generally have less downside risk. The lower a price/book ratio gets, the less risk there is of the bank disappointing the market and the greater potential there is for it to outperform expectations.
I prefer the price/book ratio over the price/earnings ratio for bank stocks. Why? Because bank earnings can be erratic. Thus, the P/E ratio for a bank coming off a particularly good or bad year will be skewed. Assets, on the other hand, are much less volatile and relatively easy for an accountant to value.
| Bank | Price/Book Ratio | Score |
|---|---|---|
| Fidelity Bank (FIDELITY.NL) | 0.29 | 10 |
| Sterling Bank (STERLNBA.NL) | 0.37 | 10 |
| Diamond Bank (DIAMONDB.NL) | 0.38 | 10 |
| Skye Bank (SKYEBANK.NL) | 0.46 | 9 |
| Access Bank (ACCESS.NL) | 0.60 | 9 |
| United Bank for Africa (UBA.NL) | 0.68 | 8 |
| Ecobank Transnational (ETI.NL) | 0.71 | 8 |
| First City Monument Bank (FCMB.NL) | 0.83 | 7 |
| First Bank of Nigeria (FIRSTBAN.NL) | 0.96 | 6 |
| Zenith Bank (ZENITHBA.NL) | 1.17 | 5 |
| Stanbic IBTC Bank (IBTCCB.NL) | 1.58 | 3 |
| Guaranty Trust Bank (GUARANTY.NL) | 1.99 | 1 |
5. Dividend Yield
Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stock’s share price. Therefore, most banks won’t raise dividends beyond a level they believe they can sustain.
| Bank | Dividend Yield | Score |
|---|---|---|
| Fidelity Bank (FIDELITY.NL) | 10.29% | 10 |
| Access Bank (ACCESS.NL) | 8.56% | 9 |
| Sterling Bank (STERLNBA.NL) | 8.33% | 8 |
| First Bank of Nigeria (FIRSTBAN.NL) | 7.42% | 7 |
| Guaranty Trust Bank (GUARANTY.NL) | 6.89% | 7 |
| Zenith Bank (ZENITHBA.NL) | 6.72% | 7 |
| Skye Bank (SKYEBANK.NL) | 6.41% | 6 |
| Diamond Bank (DIAMONDB.NL) | 6.12% | 6 |
| First City Monument Bank (FCMB.NL) | 5.82% | 6 |
| Ecobank Transnational (ETI.NL) | 5.34% | 5 |
| Stanbic IBTC Bank (IBTCCB.NL) | 1.40% | 1 |
| United Bank for Africa (UBA.NL) | 1.12% | 1 |
Winner, Winner, Chicken Dinner!
Now let’s put all the above scores together. Perhaps unsurprisingly, blue-chips like GTBank and Stanbic IBTC posted good profitability, growth, and asset quality scores, but lagged far behind when comparing value and dividend yield.
Meanwhile, high-yielding, low-priced stocks like Diamond Bank and Fidelity Bank performed poorly in terms of profitability and asset quality.
Two banks, Access and Sterling, performed well enough on all five scales to post the highest scores. In fact, they tied with a composite score of 37!
But after all this hoopla, a draw would be anticlimactic, wouldn’t it? So, I decided to give the tiebreaker to the largest bank in terms of total assets. Why? Larger banks are generally less risky than smaller ones.
As of the end of 2011, Access Bank’s asset base totaled NGN1,634 billion (roughly $10.4 billion). Sterling Bank’s total assets are NGN504.4 billion (approximately $3.2 billion).
So we have a winner of my first ever Nigerian Bank Stock Showdown! Congratulations to Access Bank (ACCESS.NL)!
| Bank | ROA Score | Growth Score | NPL Score | P/B Score | Yield Score | Total Score |
|---|---|---|---|---|---|---|
| Access Bank (ACCESS.NL) | 5 | 10 | 4 | 9 | 9 | 37 |
| Sterling Bank (STERLNBA.NL) | 3 | 8 | 8 | 10 | 8 | 37 |
| First Bank of Nigeria (FIRSTBAN.NL) | 7 | 5 | 10 | 6 | 7 | 35 |
| Ecobank Transnational (ETI.NL) | 4 | 9 | 8 | 8 | 5 | 34 |
| Skye Bank (SKYEBANK.NL) | 4 | 8 | 7 | 9 | 6 | 34 |
| Guaranty Trust Bank (GUARANTY.NL) | 10 | 6 | 9 | 1 | 7 | 33 |
| Zenith Bank (ZENITHBA.NL) | 7 | 5 | 9 | 5 | 7 | 33 |
| Fidelity Bank (FIDELITY.NL) | 5 | 7 | 1 | 10 | 10 | 33 |
| First City Monument Bank (FCMB.NL) | 3 | 2 | 10 | 7 | 6 | 28 |
| Stanbic IBTC Bank (IBTCCB.NL) | 9 | 6 | 6 | 3 | 1 | 25 |
| Diamond Bank (DIAMONDB.NL) | 1 | 3 | 3 | 10 | 6 | 23 |
| United Bank for Africa (UBA.NL) | 3 | 1 | 7 | 8 | 1 | 20 |
What Do You Think?
Did the results surprise you? Are there other criteria you would add to the Showdown? Would you change the weights to some indicators? Is my method madness? Let me know your thoughts in the comments!
[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]
Pretty helpful for a newbie like me your, learnt a couple of things…thanks
Thanks and welcome, Netotse!
Nice quick analysis. What is your next analysis framework before a final buy decision? The Kenya NSE is also dominated by banks and look forward to your similar analysis. Great blog you have… only recently subscribed.
Hi, Mythics, and thanks. The next step involves some more detailed financial statement and qualitative analysis. Eventually, we’ll want to end up with a valuation estimate. It can be a bit time-consuming, so it can be helpful to start with a short-list like this.
We’ll save some of the more detailed analysis for future posts. And you read my mind regarding Kenya. I’m working on a survey of the sector as we speak!
Thanks. I also asked one of my colleagues to try and develop a similar model for the listed KE banks. Will compare with yours once both are done. Do you have the annual reports or have you found a good broker? Just curious where you get the reports from.
I maintain a library of annual reports. At some point, I hope to upload them to this site.
i want to invest in stocks but did not know which one to go for.But with this article i think i.’m good to go
Glad you found the article helpful, Edet. If you’re interested in Nigerian stocks, I highly recommend checking out http://www.stockmarketnigeria.com. They’ve got a great community of informed and helpful investors to bounce ideas off of.
Just read that Access declared a 20% drop in profits in the last quarter… ?
Hi Ayodele,
That’s incorrect. I think I see the article where that information came from. The journalist miscalculated. They compared the first quarter of 2012 to the entire YEAR of 2011.
Profit after tax for the first quarter of 2012 actually increased 112.9% over the first quarter of 2011. Here’s a link to the results.
http://www.accessbankplc.com/Library/Documents/result_announcement/Unaudited_First_Quarter_2012_March.pdf
Thanks Ryan, for this information. I really look forward to more of it.
I appreciate you taking the time to comment, Deji. Thanks for being here!
pls in overall rating of the bank, which banks come out as top ten in nigeria? And where does diamond bank fall in?
Hi Henry,
The ranking you’re looking for appears in the final chart of the article. The banks are ranked from highest total score to lowest. Diamond Bank ranked as #11 out of the 12 banks surveyed.