Amidst Increased Risk, Analysts Bullish on Banking Stocks
Despite increased risk and uncertainties in the banking sector, some financial analysts still foresee immense value in banking stocks this year. The banking sector is entering a new phase, as players are expected to transact in the more traditional business of banking as opposed to focusing more capital to highyielding risk-free investments.
According to analysts at Cordros Capital Limited, the changing dynamics both within and outside the industry, will make the competitive landscape to become even more intense as banks grapple with new players and more determined old foes.
However, they said despite increased risk in the sector, there remains immense value, in part due to pressured stock prices which were affected by the generally weak sentiments that pervaded the market in 2019.
“Consequently, we reiterate our recommendation that long-term investors should look to take positions in our recommended stocks, with a view to extracting value as the market corrects in future periods,” they said.
The analysts insisted that the narrative has been that the fundamentals of the banking sector remained compelling even as market sentiments have kept prices low.
“However, this may no longer be the case as persistent regulation heightens the overall risk in the sector. After adjusting for increased risk in the cost of equity, the valuations of our coverage companies remain compelling and hold value for both short and long-term investors. Nonetheless, the majority of stocks in our coverage universe have ‘Buy’ recommendations, with FBN Holdings Plc being the outlier with a ‘Hold’ recommendation assigned.
They said the pace of growth of the banking sector has been strong as revenue, profitability and assets have all expanded in the year, relative to the end of 2018.
“However, the year has also been fraught with challenges as the Central Bank of Nigeria (CBN) has instituted policies aimed at driving credit extension to the private sector, which in our point of view has increased the overall risk in the sector at a precarious time,” they said.
The analysts noted that with the new direction, the trajectory of growth in the revenue of banks will steepen as risk asset portfolios expand, adding that that this would come with increased systemic risk, given the pace of growth, and the still fragile state of the economy.
“Consequently, we expect the cost of risk across the industry to spike going towards 2021 full year and non-performing loan (NPL) moderation to temper following an initial dip that will follow the significant loan growth. Notwithstanding, NPLs will spike in the event of any stress to the system, which could easily cascade into wider systemic
frailty,” they added.
They said that 2020 will herald an evolution of the Nigerian banking sector, as the policyinduced-shift risk asset creation drive will see credit to the real economy increase swiftly, just as the spread between risk-free assets and loans narrows due to competition.
“While the argument for increased credit extension and lower interest rates for driving growth are compelling, in our view, this needs to be at the appropriate time and in an environment that is structurally suitable. Hence, in our opinion, the overall risk to the sector is higher than it has been in recent times,” they said.