The global financial market’s instability that was propelled in recent years by the crash of crude prices at the international market and the ongoing currency war have crippled the banking systems of many counties. Realising the importance of the sector to the well being of their economies, some nations managed the signs of stress to avoid panic in their financial market.
The reason why banks in many countries betrayed telltale signs of stress is not far fetched, given their high exposure, just like many financial institutions to oil related businesses, being a money spinning industry.
This was however before the oil industry’s earnings power nose-dived seriously due to discovery of shale oil in the U.S, aided by oil glut that negatively impacted prices of commodity, throwing the budgets of oil dependent nations like Nigeria off balance.
Also, there was the unexpected vote by Britons to exit the Eurozone that shocked the world, just as last month’s emergence of Donald Trump as U.S. President elect. Add this to the recent interest rate hike in the U.S that is now redirecting flow of funds in the financial markets.
Without doubt, the banking industry of any economy remains its engine room for growth and development. Consequently, every nation keeps a tab on the health of its banking institutions as any fundamental defects in this strategic sector could destabilize the entire economy, system and in fact, the government. This is one major consideration that informed the periodic consolidation exercises in the Nigerian banking industry to make it robust and healthy as approved by the CBN and other regulatory bodies like Nigeria Deposit Insurance Corporation and Securities & Exchange Commission to avoid bank failure and boost public confidence.
To underscore the importance of the health of banks, one only needs to x-ray the recent financial crisis that engulfed Greece and other big economies of the world that had to decide between hiking or cutting interest rates to avoid another deflation. The economic pressure on these countries were blown into the open when their leading indicator- the stock market became volatile. Prices of many stocks continued to nose-dives and oscillate as a pointer to the fact that some of these big economy had been under intense pressure.
Nigerian banks have remained resilient and healthy a situation that has been attested to repeatedly by the central bank at a time some local and international agencies have voiced concern. These concerns have been that many of Nigerian banks are highly exposed to oil and gas risks that might affect the fundamentals as the economy battles with full blow recession likely to increase the non-performing loans of the banks.
But since November 30, 2016 when members of the Organisation of Petroleum Exporting Countries (OPEC) agreed to cut supply, the first time in a decade, oil price has continued to rally, peaking at $55 per barrel in recent times. There is the possibility of its remaining above $53pb, amidst expectation that it would hit $60 and above in the new year. This is especially at a time non-OPEC members like Russia also agreed to cut output by as much as 300,000 barrel per day to sustain oil price.
You would have noticed in recent times that prices of stocks in the oil and Gas sector, especially those operating in the upstream sub-sector and earning revenue in US$ have rallied, despite their negative numbers before the OPEC deal. The downstream companies that are into marketing of finished products and lubricants have equally attracted improved valuation with their bottom-lines of the operators in petroleum marketing business, helped by the removal of subsidy on Premium Motor Spirit or petrol. The increased in pump price has also improved profitability of operators, thereby positively impacting the financial market, especially banks that were highly exposed to the sector, due to the inability of operators to service their loans.
The banks were therefore forced to make huge provision as mandated by CBN, a situation that led to the eventual collapse of many banks after the 2009 CBN stress testing.
It is expected that the exposure of banks to the oil industry would considerably reduced by the expected recovery in crude oil prices in the international market as a result of cut in supply. There is also hope of improvement in Nigeria’s production output with the proposed peace talks between the Federal Government and Niger Delta militants.
The bank’s will also benefit from the proposed bailout of the power sector by the federal government and World Bank which will also reduce their exposure to that critical sector.
This likely increase in crude prices in 2017 would significantly improve the working capital of oil and Gas industry operators, ensuring that many become able to service their debts. They would also be able to discuss new credit lines for financing their businesses with their banks, just as we expect petroleum marketing companies to diversify, while boosting profitability and income streams in the coming year. This situation will be of great benefits to the banks as any payment for loans already provided for in their books will automatically become profit, meaning that the banks are likely to post better earnings come 2017 coupled with the exchange rate that has boosted the bottomline of many banks in the recent quarters helped by the flexible rates adopted in the country.
***Market players and investors, especially those with long term objectives, certain areas of strength or fundamentals of a bank are very critical to the consideration they need to know before taking investment decisions. Some of these include the banks’ financial strength as can be gathered from their shareholders’ funds, size of deposits, gross income, asset base, and profit after tax, management style, and risk management, among others. All the consolidation exercises in the industry had helped to strengthen Nigerian banks and this made it possible for them to withstand the harsh effect of the global meltdown, oil and power exposure. The enormous headwinds facing the banks have expose it high volatility in earnings and price performance, in this high risk environment of uncertainties in the financial sector and the economic at large. The amount of provision by the banks have revealed how much this has affected the banks making investing public to be skeptical about banking stocks but on the strength of the current year financial position of many banks investors should expected dividend from some of the banks and expect their numbers in the coming year to improve and influence share price positively. Investors should become more discerning about where to invest their funds profitably in 2017 as we expect this economy to be in a recovery move in the New Year as more concrete efforts and strategic economic blue print are expected from the economic managers to drive the recovery.
Let the table below guide you.
Banking Industry Earnings Table
Securities Q3 2013 EPS Q3 2014 EPS Q3 2015 EPS Q3 2016 EPS Q2 2016 EPS BVPS Current PE Ratio Last Full Year EPS Div 2015 Intrim
Div
2016 Remarks
FBNH 1.80 1.70 1.40 1.17 1.00 17.05 3.10 0.42 0.15 –
ACCESS 1.21 1.54 1.66 1.97 1.37 13.25 3.94 2.28 0.55 0.25
DIAMOND 0.69 1.39 0.69 0.15 0.39 7.11 3.26 0.24 —– –
ETI 3.02 3.29 3.37 1.78 1.08 28.18 10.28 1.16 0.02Ce –
FIDELITY 0.38 0.39 0.39 0.30 0.19 6.33 4.95 0.48 0.16 –
FCMB 0.67 0.72 0.09 0.79 8.76 1.47 0.24 0.10 –
GTBANK 2.35 2.27 2.55 4.07 2.74 16.72 8.83 3.38 1.77 0.25
SKYE 0.88 0.75 0.86 – 10.18 -0.23 -2.93 —- –
STANBIC 1.61 2.53 1.36 2.02 0.86 14.48 15.45 1.94 0.95 –
STERLING 0.32 0.33 0.26 0.19 0.14 4.86 8.83 0.36 0.09 –
UBA 1.13 1.02 1.34 1.44 0.94 11.24 2.95 1.64 0.60 0.20
UBN 0.56 0.48 0.55 0.76 0.52 14.62 9.23 0.83 —– –
UNITY 0.03 0.29 0.80 0.29 0.20 7.13 3.70 0.40 —- –
WEMA 0.01 0.06 0.03 0.04 0.06 1.18 10.50 0.06 —— –
ZENITH 2.22 2.26 2.65 3.19 1.46 22.16 9.75 3.37 1.80 0.25