Stock Showdown: Ranking Nigeria’s Best Banks

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.

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.

I walk through my method here.

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.

Photo by André Silvestre

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:

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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:

[table id=10 /]

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:

[table id=11 /]

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.

[table id=12 /]

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.

[table id=13 /]

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)!
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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.]

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Buyers Wanted: 9 Cheap Nigerian Stocks

Nigeria investors must feel a tad punch-drunk after the drubbing they’ve been dealt over the past five years. The Nigerian Stock Exchange has lost nearly half of its value since March 2007.

With local investors cautious, disillusioned, and happy to sit on the sidelines, I’m beginning to see some very interesting opportunities among the exchange’s 200-plus listings.

Nigeria investors must feel a tad punch-drunk after the drubbing they’ve been dealt over the past five years. The Nigerian Stock Exchange has lost nearly half of its value since March 2007.

With local investors cautious, disillusioned, and happy to sit on the sidelines, I’m beginning to see some very interesting opportunities among the exchange’s 200-plus listings.

Photo by Shawn Leishman

If you’ve got a Nigerian brokerage account, the chart below contains nine stocks that I think you should take a close look at. All have recently reported 2011 earnings, and all appear to offer growth at a bargain price.

Need a little extra incentive? Take a look at their dividends. Most offer yields well in excess of five percent.

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My guess is that these companies could be among the top-performing African stocks over the next few years. Do you agree? Let us know your favorite Nigerian stocks 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.]

How to Invest on the Nigerian Stock Exchange

The Nigerian Stock Exchange hasn’t exactly sizzled of late. But the potential of Africa’s most populous nation is enormous. First things first, however. I need a Nigerian brokerage account. So, how exactly do I go about opening one?

The Nigerian Stock Exchange hasn’t exactly sizzled of late.

A domestic banking crisis and political turmoil slashed the MSCI Nigeria Index 60% from its record 2008 highs.

But the potential of Africa’s most populous nation is enormous. A 60% drop tells me that it’s an opportune time to scour sub-Saharan Africa’s second largest stock market for bargains.

But first things first. I need a Nigerian brokerage account. So, how exactly do I go about opening one? Let’s take a look-see.

Nigerian Stockbrokers

In all previous posts in this “How to Invest” series, I have made an attempt to contact every single stockbroker registered as a dealing member of each respective exchange. I must confess that I didn’t succeed in doing that for this article. Why not? Because there are 327 brokers licensed to trade on the Nigerian Stock Exchange.

I narrowed this list down by visiting each of their websites. Any websites that seemed out of date or less than professional looking, didn’t make the shortlist. I admit this was a totally subjective process that may have excluded some fine brokers, but I needed to start somewhere.

Photo by S. Remeika

I then emailed all brokers that survived my initial website evaluation – a few dozen in all. I asked each broker if they catered to foreign investors, how much they required to open an account, and what documentation was necessary. I found nine brokers with reasonable account minimums to be particularly helpful and responsive. Each broker below responded to my initial query within one business day.

Broker Minimum Initial Deposit Account Opening Form Research Sample
ARM Securities N100,000 (approx. $635.00) Here Here
CardinalStone N1,000,000 (approx. $6,350.00) Here Here
Chapel Hill Denham None Here Here
Cowry Securities N500,000 (approx. $3,150.00) Here Here
Lead Capital N50,000 (approx. $315.00) Here No Recent Online Research
Meristem N2,500,000 (approx. $15,850.00) Here Here
UBA Stockbrokers N250,000 (approx. $1,585.00) Not Available Online No Recent Online Research
Zenith Securities N250,000 (approx. $1,585.00) Here No Recent Online Research

Trading Costs

Commissions and fees are assessed on a sliding scale that is standard across all brokers. For transaction amounts less than N1,000,000 (roughly $6,350.00) you will pay 1.86% when purchasing a stock and 2.19% when selling one. For larger transactions, commissions and fees total 1.49% of the total transaction value to buy and 1.82% of the total transaction value to sell.

Opening a Nigerian Brokerage Account

Now let’s walk through the process of opening an account with a Nigerian stockbroker and buying your first shares.

Step 1: Complete the CSCS Account Opening Form

The Central Securities Clearing System (CSCS) records the ownership of Nigerian securities via electronic accounts. When you ask a broker to open a trading account, they will send you a copy of the CSCS Account Opening Form (sample from ARM Securities here). You will then be assigned a CSCS account number. This number will accompany every Nigerian stock trade you execute, allowing the CSCS to keep record of all your holdings in the country.

Step 2: Complete the Broker’s Account Opening Form

After your first email to the broker requesting information on how to open an account, they will also send you a blank account opening form. Sample forms from each broker may be found in the above table. The form typically requires disclosure of your passport number or other ID number, your address, and banking details.

Step 3: Collect two color passport-sized photos of yourself

You might as well get a bunch of them while you’re at it. They always seem to come in handy.

Step 4: Photocopy your passport

If you don’t have a valid passport, a copy of your driver’s license may suffice.

Step 5. Photocopy a recent utility bill that can be used to verify your place of residence

Most brokers require a water or electricity bill dated within the most recent three months.

Step 6. Send the original CSCS form, account opening form, passport photos, copy of your ID, and copy of your utility bill to your broker via DHL or FedEx

You may email photocopies of all documents to your broker to get a head start on the account opening process, but they must eventually receive the original documentation. And do yourself a favor by sending it via a courier like DHL or FedEx. Couriers are expensive, but they’re more reliable than the postal service. I’ve learned that the hard way.

Step 7. Wire Funds to Your Brokerage Account

After opening your trading account, your broker will provide you with its bank details so that you can fund your account. The most efficient way to do this is via wire transfer. If you haven’t sent an international wire before, I suggest that you take your broker’s bank details to your local bank branch and ask them to walk you through the process. They’ll make sure that your funds arrive securely. Note that most US banks charge about $25 for outgoing international wires.

Step 8. Submit a Trade Order

You’ve done your research and found a stock that you’d like to buy. What now?

While some brokers will request a signed trade mandate form, for most brokers, all you need to do is send an email to your broker with your trade instructions. Keep in mind that some shares on the Nigerian Stock Exchange are rather illiquid, so I advise specifying a limit price for all of your orders. This will help you avoid paying significantly more for your shares than you had intended to pay.

Your broker will then execute your trade and send you a contract note that specifies the buy or sell price, commissions, and fees. Settlement of share trades takes four business days on the Nigerian Stock Exchange, so if you’ve sold shares, don’t expect to receive the proceeds of a sale before then unless you’re willing to incur a penalty to settle the trade more quickly.

A Note on Dividends

Collecting dividends from Nigerian stocks is relatively painless. Upon opening your account, simply instruct your broker (in writing) that you would like all dividends paid on your holdings to be deposited directly into your trading account.

Mission Accomplished

That’s it! Follow these steps and you’re all set to begin investing in Nigerian stocks.

The process of opening a foreign brokerage account can be confusing. If you found this walk-thru to be clear as mud, please don’t be shy. Post your questions in the comments, and I’ll do my best to get answers for them.

Further Reading

How to Invest on the Botswana Stock Exchange
How to Invest on the Ghana Stock Exchange
How to Invest on the Ivory Coast’s BRVM
How to Invest on the Uganda Securities Exchange
How to Invest on the Zimbabwean Stock Exchange
How to Invest on the Nairobi Stock Exchange



New ETF to Ease Investment in Nigeria

I’m a big fan of the folks at Van Eck Global. They’re making frontier stock markets more accessible than ever before. Over the past three years, the money manager has launched exchange-traded funds (ETFs) covering Colombia, Indonesia, and Vietnam. It also set up the most diversified African ETF, the Market Vectors Africa Fund (AFK).

Now they’re preparing to launch a Nigeria ETF, which, to my knowledge, would be the first of its kind.

The fund will try to mirror the performance of the Market Vectors Nigeria Index, which is comprised of companies that are either based in Nigeria and listed on its stock exchange or companies that generate the majority of their revenue in Nigeria.

Van Eck hasn’t yet announced a launch date for the fund, but, in my mind, it can’t come soon enough. The Nigerian market looks like a promising place to park some assets.

Photo by Sremeika

Just last month, Morgan Stanley released a very bullish report on the Nigerian economy in which they forecasted growth of 8.4% this year and 8.5% next year. If the country stays on its current growth trajectory, it will likely overtake South Africa and become the continent’s largest economy by 2025.

Notably, Morgan Stanley’s analysts don’t see oil being the prime driver of this growth in the near term. Instead, they see the telecommunications, construction, and retail sectors doing the heavy lifting. Why? The government recently raised the minimum wage by more than 5%, putting more money in consumers’ pockets. There’s also big infrastructure spending on the horizon and a system to remove bad debts from banks’ balance sheets.

Unfortunately, we don’t yet know which specific companies will constitute the Nigeria ETF, but I’m guessing the following companies will be represented.

  • Nigerian Breweries (PE Ratio: 21.9, PB Ratio: 13.3, 5-year Annual Income Growth: 29.7%) – Majority-owned by Heineken, the country’s largest brewer has posted phenomenal earnings growth the past few years. The increasingly affluent population should ensure that there’s plenty of beer to be sold in spite of increasing competition.
  • Zenith Bank (PE Ratio: 12.4, PB Ratio: 1.3, 5-year Annual Income Growth: 23.7%) – With the Nigerian government absorbing its toxic loans, Nigerian banks like Zenith look to be on the turnaround. Zenith prides itself on being a technology-leader among its peers and is the country’s largest bank in terms of market value. It also operates subsidiaries in Gambia, Ghana, and Sierra Leone.
  • Guaranty Trust Bank (PE Ratio: 11.7, PB Ratio: 1.7, 5-year Annual Income Growth: 34.7%) – The first Nigerian bank to cross-list on the London Stock Exchange, GTBank operates 160 branches throughout the country. It is a leader in business banking and known for its innovative products.
  • First Bank of Nigeria (PE Ratio: 12.9, PB Ratio: 1.2, 5-year Annual Income Growth: 18.9%) – First Bank traces its roots back 117 years and is a leader in the retail banking segment. Management has recently hinted at an acquisition that would expand its geographic footprint well beyond its Nigerian home.
  • United Bank for Africa (PE Ratio: 17.0, PB Ratio: 0.8, 5-year Annual Income Growth: -43.5%) – One of Africa’s most geographically-diversified banks, UBA operates in 18 African countries. It intends to launch subsidiaries in Congo-Brazzaville and Mali this year.

I expect fees to be roughly equivalent to the Market Vectors Africa Index ETF (AFK). AFK’s annual expense ratio presently stands at 0.83%.

Disclosure: I have a long position in the Market Vectors Africa Index ETF (AFK).

Related Reading

New ETF Makes Nigerian Stocks More Accessible Than Ever
How to Invest on the Nigerian Stock Exchange