With the current harsh operating environment, exacerbated by impact of COVID-19 on businesses, investors have expressed worry that the banking sector might record rise in Non-Performing Loans (NPLs) and erode profitability, if government failed to provide support to boost performance and sustain growth.
This is because banks play critical role of mobilising savings from surplus economic units to deficit areas to stimulate investments.
Investors argue that banks’ shares are currently selling on discount in the stock market, considering their book value per share, following economic turmoil occasioned by COVID-19 shutdown and other socio-political crisis
This means that market value of banks are below the book value per share. For instance, the book value of one of the leading banks is 32.94, while market value is N22.60 kobo as of December 14, 2020.
According to analysts, the banking sector, which has been the most liquid in the Nigerian equity market over the years, has come under significant headwind in recent months.
From strict regulatory guidelines to the current systemic risk, COVID-19 and the drop in oil price have triggered a spate of sell-offs in the market, further affecting the banking sector. The pandemic has severely affected businesses; causing low patronage, dip in revenues, higher cost of operations, and crushing debts.
The situation has impacted negatively on the third quarter (Q3) result of some biggest banks, especially as several events in the country point to an uncertain 2021 for businesses.
According to data from the National Bureau of Statistics (NBS), total banking sector credit to the economy stood at about N18.8 trillion in the second quarter of 2020, up from N17.1 trillion at the end of 2019. However, NPLs at the end of the second quarter of 2020 rose by 2.27 per cent to N1.2 trillion.
Although a recent release by the NBS showed the total amount of NPLs in Nigerian banks fell from N1.21 trillion in second quarter of 2020 (Q2 2020) to N1.17 trillion as of Q3 2020; the investors maintained that increase in banks’ Loan-to-Deposit Ratio (LDR) to 65 percent last year, was to improve lending to the real sector, but has pulled a large chunk of money from the banking system.Although, they affirmed that the market has recorded unprecedented growth in the past few months, it is argued that government’s inability to provide an enabling environment that would boost operations of companies under the real sector and improve their profits would ultimately depress the market, shore up bank’s Non-Performing Loans (NPLs), and erode their profitability.
Presently, the five big banks (FUGAZ) — FBN Holdings, United Bank for Africa (UBA), Guaranty Trust Bank (GTBank), Access Bank and Zenith Bank— are currently trading at values described by operators as very low, compared to their fundamentals.
A look at the third quarter (Q3), 2020 performance of the banks revealed that despite efforts to cope with the pandemic, profit of some Tier one banks, especially GTBank and UBA, dropped.
For the Q3 ended September 2020, United Bank for Africa’s (UBA) unaudited result showed 5.99 percent growth in gross earnings, from N428.7 billion in September 2019 to N454.4 billion in 2020.
However, its profit before tax fell from N98.2 billion to N90.4 billion, while Profit After Tax (PAT) stood at N77.1 billion; thus putting the annualised return on average equity at 16.4 percent.
The bank’s total assets grew to N7.1 trillion, a 26 percent increase from the N5.6 trillion recorded at the end of December 2019.
UBA also said shareholders’ funds grew by 9.6 percent to N655.3 billion from N598 billion recorded in December 2019, thus reflecting strong capacity for internal capital generation and growth.