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Below are the excerpts of an article in a recent copy of The Economist magazine analyzing Nigerian banks. And it doesnt paint a rosy picture at all.

The prices of the banking stocks have been dropping all year. They alluded to a research by JP Morgan Chase (you can read it here) which stated that the banks, with a combined value of over $40billion are about 56% overvalued.
Some of the problems identified in the article are:

1. Lack of transparency. The example of UBA which was fined over $15m by the US banking regulations is cited.
2. Weak regulations.
3. Shady bank practices - banks lending money to investors to buy shares from the banks which result in the rise in their stock prices.

Yet share prices have been dropping throughout 2008, suggesting a lack of confidence. Would-be investors have started to eye Nigeria’s banks, in particular their regulatory practices, more warily. Some wonder whether the apparent gains of the past few years are all they seem. “The foundation is not there, it’s weak,” says an analyst, Osaruyi Orobosa-Ogbeide, of a Lagos-based firm, Financial Derivatives.

Though banking standards have certainly risen a lot in recent years, they still lag behind those of America and the European Union, particularly in terms of transparency. In April, United Bank for Africa, one of the country’s biggest, fell foul of American regulators who served the bank with a $15m fine for ignoring anti-money-laundering regulations despite several warnings. “There’s no resemblance at all between operating in Britain or America and operating in Nigeria,” says Fola Fagbule, a research analyst with Afrinvest. “It’s light years apart, and it’s an issue [the banks] need to address”.

The top seven Nigerian banks, with a combined market value of almost $40 billion, are overvalued by as much as 56%, according to a report published in May by JPMorgan, an American financial-services company. Part of the problem is that banks have used their own money to push up their stock prices by engaging in risky lending to corporations and individuals who invest in the banks’ own shares.

Those in charge of imposing some order on the sector have also been found wanting. After share prices began to fall earlier this year, the central bank set a floor on trading in a bid to buoy the market. Investors were left with no choice but to hold on to stocks; that unnerved many of them. Bismarck Rewane of Financial Derivatives described the action as “a disorderly intervention in a chaotic market.”

Lamido Sanusi, a risk-control officer who will take over next January as the head of Nigeria’s oldest bank, First Bank, is disappointed that regulators are not tougher in insisting on transparency and disclosure of information. Foreign investors demand open banking procedures, he says, yet banks are not now obliged to open their books to scrutiny. “Are these banks being properly managed? Are these assets being properly deployed?” asks Mr Sanusi. “We don’t know the reality.”

Nigeria is sub-Saharan Africa’s second-biggest economy after South Africa’s and the world’s eighth-largest oil exporter, yet the continent’s most populous country (with 140m-plus citizens) has yet to fulfil its economic potential. A robust banking sector that everyone can have confidence in is essential; the country’s reformers and regulators cannot rest on their laurels.

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The Central Bank of Nigeria (CBN) yesterday shifted the deadline for Banks to adopt a uniform accounting year end to December 2009. This according to CBN was in response to “irrational behavior” of some banks in their attempt to mobilize deposits. The direct impact of this announcement could at least ease the current strain in liquidity created in a bidding continuum following the banking industry’s battle for deposits.

This could unravel a long sought key to unlock institutional funds. The key to market recovery in our view remains a total change in general mindset. We perceived that prevailing sentiment has been largely speculative and short-term, which has consistently denied the market the so desired rally and momentum. We can’t conclude without pointing out that this has, in a way, present opportunities for investors seeking long positions as some equities are currently trading in their oversold bands. Here is CSL Securities’ view of the impact of this announcement:

In our opinion, The CBN postponement by one year for banks to converge their year end may offer a respite both for the banking sector directly and also the capital market as the sector constitutes above 60% of the market capitalization of the Nigerian Stock Exchange. While the banks may heave a sigh of relief, stakeholders, especially Nigeria’s foreign partners and investors may worry about the credibility of CBN or question the decision-making process of the industry regulator, as policy somersaults have been the bane of the country both in the past and in the present times.

It can be hoped that Nigerian banks will put on their thinking caps to utilize this window of time extension to ensure an orderly convergence without doing damage to the banking sector and the economy as a whole. We also hope that regulatory authorities and managers of the Nigerian project will be more consultative and engaging with industry operators and stakeholders in making major policy decisions that impact on the economy.

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Nigerian banks have been fairing well of recent. Oceanic Bank, UBA and GT Bank were among the banks that the most significant rises in the last year. Oceanic Bank leaped 565 places to now be ranked the 310th top bank in the world while UBA, GT Bank and Access Bank are ranked 392nd, 369th and 359th respectively. I more surprised by the performance of Access Bank. I wasnt expecting them to be so highly ranked. The rankings of other banks will be posted as soon as they are received. Here is an excerpt of the report from The Banker Magazine:

At first and second place were Nigerian banks. Oceanic Bank leaped a staggering 565 places up the rankings from 875 in last year’s rankings to 310 in 2008. The bank’s Tier 1 capital exploded from a meagre $297m to $1.75bn. United Bank for Africa also made spectacular strides, jumping 484 places to 392, with a growth in Tier 1 capital from $296m to $1.25bn.

A third Nigerian bank, Guaranty Trust Bank, also made it into the Top 10 in 2008. It registered Tier 1 capital of $1.38bn, up from $406bn last year, and soared 371 places in the rankings to 369. Nigerian banks’ phenomenal growth was triggered by laws passed in 2005 setting a minimum capital requirement of about N25bn ($195m). The legislation was followed by a consolidation of the banking sector from 89 banks in 2005 to 24 banks today.

In a separate report, The Banker Magazine also reported that Nigerian banks are seriously catching up with their South African counterparts:

The total Tier 1 capital of Nigerian banks in the Top 1000 has more than doubled to $11.29bn in 2008’s rankings from $5.38bn in 2007. It takes Nigeria’s share of the sub-Saharan pie to 34% of total Tier 1 capital, up from 24% in 2007. South Africa’s share of the pie has fallen from 71% last year to just 62% in 2008.

New entries among the world’s Top 1000 banks are Platinum-Habib Bank and Access Bank. In terms of growth, it is Access Bank that has impressed the most. In 2007, it did not even feature in the Top 1000 World Banks, and yet this year it enters the league at number 359, with Tier one capital of $1.43bn.

Other impressive performers this year include Oceanic Bank, which shot up the rankings from 875th in the world in 2007, with Tier 1 capital of $297m, to 310th in the world today, with Tier 1 capital of $1.75bn.

Guaranty Trust Bank also performed well. It leaped 371 places in the global rankings to 369th, with Tier 1 capital of $1.38bn, up from $406m last year. United Bank for Africa also made good headway in the rankings. It is now the 392nd biggest bank in the world with Tier 1 capital of $1.25bn. This is up from 876th place last year, when it had just $296m in Tier 1 capital.

The next step for Nigeria’s banks is to convert such phenomenal capital growth into profits. This year’s figures show that despite such enormous growth, return on capital for the sector has actually fallen from 21.9% last year to 18.6% this year. In South Africa, however, return on capital leaped from 38% to 42%.

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Results for Oceanic, Chevron, First Bank, Skye Bank, UBA and Skye Bank. Chevron declared a loss of over N190m which was attributed to the strike earlier in the year. Profits for First Bank, AIICO, Skye Bank and Oceanic Bank increased 80% (to N36b), 387% (to N401m), 235% (to N10.87b) and 145% (to N33.6b) respectively. Profits for Access Bank reduced 1% to N15.85b.

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JP Morgan recently prepared an extensive report analyzing the top Nigerian banks.You can read the report here.JPM Nigerian Banks Research Report (83)
The major points are:

1. Nigerian banks appear expensive on a relative and absolute basis
2. Nigerian banks’ earnings growth is likely to outstip most other emerging markets over the next few years
3. Nigeria is one of the riskier emerging markets
4. The P/E ratio is expected to converge to other emerging markets
5. Oceanic bank is rated as a lower quality/high risk operation compared to its peers
6. GTB is the top pick as it is the only bank of the top 7 offering positive share price performance on a 12 month view while First Bank and Intercontinental are the least preferred of the top banks
7. Zenith and GTB have the higest quality operations while Union Bank has the lowest quality operation
8. Concerned that the risk management capability at Oceanic and Intercontinental Banks have not kept pace with their robust growth
9. Expect an average negative return of 21% for the top 7 Nigerian banks

Strengths
- Continued strong economic growth and sustained high oil prices
- Improving regulatory environment
- Presently well capitalised
- Increasing breadth of operations lowers risk to earnings because of diversification benefits
- Senior management teams at all teh banks are experienced bankers

- Weaknesses
- Lack of nationala identification system and lack of clearly functioning credit bureau
- Significant and widening gap between Nigerian banks and their international pairs in terms of valuation
- Untest risk controls
- Banks are a major portion of the NSE
- Lack of cross-border consolidated supervision

Opportunities
- Low penetration rates as evidenced by low deposit to GDP and loan to GDP ratios
- PPP projects to fund infrastructure spend
- Growth in retail segment
- More efficient capital structures
- Continued penetration of low cost retail deposits
- Improved efficiency

Threats
- Increasing competition has squeezed net interest margins
- Consolidation
- Growing NPLs
- Dependence on local investors
- Many of the banks depend on a few senior executives

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Meristem Securities prepared a research report on the middle-tiered banks in Nigeria. Click here to read.

Here is the summary/my take-away from the report:

- AfriBank and IBTC have the highest proportion of non-performing loans (17.6% and 14%) repectively as against the perr average of 8.9%.
- Skye Bank and FCMB have the best performing loan rates of 96.8% and 94.7% as against the average of 91.1%.
- Short term loans make up over 85% of the banks’ loan portfolio.
- Deposit structure of these banks is 50% current account, 7% savings, 42% time and call deposits and the remaining other account variants.
- These banks have a sound liquidity position.
- Combined assets of these banks increased from N363bn in 2004 to N2,607bn in 2007.

Their rankings:
1. Skye Bank
2. Diamond Bank
3. EcoBank
4. Access Bank
5. Bank PHB

6. FCMB

7. Fidelity Bank

8. Stanbic IBTC

9. Afribank

Opportunities- Nigeria still has a low bank penetration rate.

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Here is the result of the latest ranking of banks based on a report compiled by ELI Business Services Support Limited and reported by the Punch Newspapers. The banks were ranked on their asset base, shareholder funds and deposits. UBA and Oceanic Bank were the 2 top performing banks.

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