Allan Gray to raise holdings of Nigerian banks
ALLAN Gray, the largest manager of non-government investment funds in Africa, is betting on Nigeria’s banking industry despite poor performances by the oil companies it depends on and widespread calls for the naira to be further devalued.
The Cape Town-based investor is adding to its stakes in Lagos-based lenders Access Bank and Zenith Bank, Allan Gray chief investment officer Andrew Lapping said in an interview in Cape Town earlier this month. He didn’t say how big the holdings are or how many shares his company is buying.
“We see a lot of value in Nigerian banks,” Lapping said. “Most people think they’re all going to zero because of the bad debts. We think they will survive, because high interest rates make the banks profitable and they have less debt to equity compared with European lenders,” he said. Under pressure Access Bank chief executive Herbert Wigwe said last month that the bank’s non-performing loans are expected to climb to “slightly below” 3 percent of total loans by the end of 2017. That compares with 2.1 percent for the nine months through September.
The banking industry is under pressure in Nigeria, where the economy was in a recession during 2016.
Non-performing loans escalated to almost three times the regulatory maximum, and foreign investors are calling for authorities to boost flexible trading of the naira before putting more money into the country.
An oil price at half its 2014 levels, combined with sabotage and attacks on oil installations that have cut output, has limited dollar supplies in the country, which vies with Angola as Africa’s largest crude-oil producer.
The bad-debt ratio at Nigerian banks rose to 13.4 percent last year. The naira was devalued in June and traded at 315.50 to the dollar by 6.53am in Lagos yesterday, while the unofficial, black-market rate was 507 naira to the dollar.
The official exchange rate should fall to 370 by the end of the year, Craig Metherell, an analyst at Avior Capital Markets in Cape Town, said in a February 10 note to investors. Investors are frustrated by central-bank policies, he said.
“Dollar illiquidity and the inability to predict the central bank’s decisions remain a constant deterrent to dollar-based investors,” Metherell said. “While we argue that valuations look cheap, we find it difficult to justify investing new money given the current status quo.”
Allan Gray isn’t the only investor that is interested in local lenders. Laurie Dippenaar, the chairman of FirstRand, Africa’s largest bank by market value, said last month it was looking to buy a mid-sized bank.
Diamond Bank, Sterling Bank and Wema Bank were among mid-sized Nigerian lenders that plummeted more than 40 percent last year as the domestic economy performed the worst since the 1980s.
“Everyone thinks the naira is going to weaken, but I’m not so sure,” Lapping said. “The bad-debt problem can cure itself over time.”
Nigerian banks are also attractive because their small size adds to their growth potential, while lending as a proportion of equity remains low at 3.5 times, Lapping said. Still, the industry’s exposure to oil remains a concern, he said.The Nigerian Stock Exchange Banking 10 Index has climbed 0.7 percent this year as gains by Access Bank, Zenith, United Bank for Africa and Fidelity Bank helped to compensate for losses in the other six members of the gauge.
“Maybe we’ve dug ourselves into a hole” by investing in Nigerian banks, Lapping said. “Even if it’s 50-50, going bust or going up, the upside is so much that it’s worth the risk.” – Bloomberg