The banking stocks seems to have benefited most from the price appreciation this week, this is not unconnected to the availability of liquid stocks in the sector – stocks you can easily buy today and sell off without worries – which is no doubt a major factor fund managers look for before selecting potential stocks to invest.
According to NSE weekly report, a total turnover of 1.567 billion shares worth N20.559 billion in 18,396 deals was traded this week by investors on the floor of the Exchange, in contrast to a total of 1.139 billion shares valued at N12.692 billion that exchanged hands last week in 17,109 deals.
Here is the point: The Financial Services industry (measured by volume) led the activity chart with 1.178 billion shares valued at N9.180 billion traded in 9,900 deals; thus contributing 75.14% and 44.65% to the
total equity turnover volume and value respectively. This tells us that most funds are invested in the banking, insurance and financial related stocks.
Why? I think the recent CBN monetary policy, which has shot the windows of opportunities in the fixed income market, is leaving everyone with no option than to buy stocks. Funds that would have been invested in fixed deposits, treasury bills and bonds are being channelled into fundamentally sound, high-yield dividend stocks – and financial stocks are receiving the highest patronage as evident in the NSE weekly report.
While the banking sector index is down by 15.23% on a year to date, quarterly, monthly and weekly data (which are up by 7.28%, 3.67% and 3.59% respectively) are reflecting the expected bullish run on CBN’s policy directives. Since banks are now lowering their minimum savings deposit rate to 1.15% per annum (10% of the new MPR of 11.5%), their cost of funds should also go down to reflect the recent changes, hence push net interest income.
Although this may not rub off on all banks, I think the big tier banks that already have low-cost fund and effective loan risk management policies will benefit most from this trend. One of the banks to watch going forward is GTB.
Analysis of GTB’s Cost of Funds
The cost of funds is how much banks and other financial institutions must pay for taking deposits from its customers. It is calculated as the total interest expense annualized, divided by average interest bearing deposits and other interest bearing borrowings, plus average non-interest bearing checking deposits.
On trailing twelve months, GTB cost of funds prints at 1.7% (interest expenses of N58,306,000 divided by N3,260, 240,000 in deposits and debts.) which is lower than 2.29% in 2019. A closer look at its profit or loss shows a decrease in interest expenses from N64.8b to N58.3b, that’s 10% lower than previous full year’s figure. In 2018, the bank’s cost of fund was around 3.3%.
It’s now clear that GTB has strategically lower its debts and cost of fund in the last 3 years while expanding customer deposit from N2.3tr to N3.1tr.
Amidst the rough operating environment, GTB has tried to boost revenue from core operations by maintaining a lower cost of funds below the industry average. With the CBN policy on savings deposit and MPR, it’s obvious the bank’s cost of the fund in 2020 might fall within 1.55-1.5%.
Will this add to the bank’s fundamental? Certainly. This will propel the bank’s net interest income and keep its EPS on TTM at per with previous year’s figure of N7. Using a risk-adjusted discount of 20%, the bank’s stock is fairly priced at N35 ( A 15% margin of safety should give us maximum valuation N29.75).
The bank’s stock closed yesterday’s session at N27, its 7-month high with no resistance in place. As market price sits above the widely watched averages (50-day, 100-day, 150-day and 200-day) with each rising at the same time, I anticipate a price appreciation to N30.77 region before we see another volatility. And if price clears the psychologically level, then its 52-weeks high of N34 is in play.
I had shared a buy alert on GTB when it was N18.85 on 10th April – click here to see my signal . The bank did deliver on my expectations.
Don’t forget to do your due diligence.