How I Compare & Trade Nigerian Banking Stocks Online – Learn How to Analyse Nigerian Stocks, Do Financial Ratio Analysis & Pick The Best Stocks To Buy.
Nigerian banking stocks are one of the most sensitive and volatile sector stocks to trade in the stock market; a fact that is not far from the strict regulatory presence of the CBN. Well! It shouldn’t be a surprise to you; your money is held in banks and if there is no effective regulation governing the management, safety and investment of these deposits, public confidence in the financial system will definitely be lost.
Let’s look at the business model of banks and how investors should approach stock selections in the sector. How do banks generate and make money? This is the first question every investor, looking for a profitable bank to buy shares, should ask. You don’t just rush into a bank because they declared a profit after tax of N200b, probe their profit drivers, analyse the trend and understand the prospect of sustaining such performance.
I have already discussed in depth, the practical process of analyzing banking stocks here, go check it.
For the purpose of comparing two banking stocks and understanding stock selection, I will share a summarized and quicker approach to know which stocks to buy using Zenith and GTBank Q1, 2018 report. Both banks, rank as top performing and most profitable banks, had just released their first quarter result as of this writing.
Now, let’s compare GTB and Zenith bank:
Who generates cheaper money more?
Banks generate money by accepting deposit from customers or issuing debt securities like commercial paper, Eurobond, etc. While deposit comes with cheaper interest expenses, debt securities are subject to market risk and if it’s a foreign debt, exchange rate becomes an indicator to watch closely.
To answer these questions, I will be using their Q1, 2018 result to compare customer’s deposit and deposit/liabilities ratio to check which of the banks generates cheaper money than the other.
From GTB’s Q1 2018, the total customers’ deposit grew by 7.4% to N2.2tr against N2tr (in 2017) while Zenith bank’s customers’ deposit in the same period fell to N3.3tr (from N3.4 in 2017), that’s like 2.9% decline.
Lest I forget, Zenith bank has overtaken First Bank as to become the largest bank by customers’ deposit.
On deposit/liability ratio, I like to know which of these banks generate cheap money in percentage terms than the other. A higher deposit ratio means that more money flows at a lower cost (interest) while a lower ratio means the bank would have to issue more debt securities to fund loan and advances.
GTB has N2.2tr customers’ deposit and total liabilities of N2.9tr as at the end of Q1, 2018, representing 75.8% (a rise from 74% in Q1, 2017). Zenith bank’s ratio has 67.3% (N3.3tr in customers’ deposit and N4.9tr in total liabilities) against 71%.
From this analysis, GTB generates cheaper money in percentage terms.
Which bank is growing its core earnings?
A bank can use the money generated from customers’ deposit or debt issue to make more money by advancing it to retail and/or corporate customers or invest in the financial market. While the former comes with the risk of default which could lead to an impairment charge, investing in the financial market isn’t devoid of market risk. As of this writing, the yield on bond, treasury bills is currently on a free fall as the federal government reduces her exposure to domestic debt by issuing more foreign currency denominated bond at a lower interest rate. This alone is a big threat to the profitability of banks that were holding back on loan and advances.
When comparing the performance of two banks for a better decision, I love to look their core earning: interest income from loan and advances or investment securities. Non-interest income is also important but when a higher percentage of banks’ earnings isn’t tied to its interest income, watch out for that red flag.
For GTB, interest income fell by 4%, from N84b to N80b driven major by the decline in interest on loan and advances to customers. As you would expect, this affected the net interest income as it fell to N59.6bn, from N66.1bn. Impairment charge reduced significantly by 52%, from N3.4bn to N1.8bn; the bank is lowering her cost of risk but the introduction of IFRS 9 is another factor they have to grapple with.
Also, Interest expenses rose significantly to N17bn ( from N13bn in Q1, 2017). From all indication, the bank seems to have financed its deposit more by 30% than it did in the previous quarter.
Zenith bank, in the similar quarter, grew its interest income by 20.3%. In figures, interest income stood at N142.6bn against N118bn while net interest income after impairment charge increased to N91.3, from N62.7. Just like it peer, the bank would have to find a way to deal with the challenge of IFRS 9 as its wind-down its bad loans (impairment charge) by 42% (from N7.9bn to N4.5bn).
As the future outlook reveals the end of free money from fixed income securities, I expect these banks to cautiously increase their loan and advances to customers but not without due diligence to avoid unprecedented spike in non-performing loans.
Having looked at the interest income, the next line of comparison is to look at their net interest margin, a measure of the ability of banks to earn from existing assets, cost of risk, profit after tax and EPS. All these have been simplified on my post on “How to analyse banking stocks“. I only shared this to help you understand the process of comparing and trading Nigerian banking stocks easily.
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