Lenders from London to Qatar are hunting for African banks to buy. No market is attracting more interest than Nigeria, where 35 million adults keep their cash at home.
“There are still massive opportunities when it comes to consumers, because lots of Nigerian banks haven’t even cracked the ice yet,” Adesoji Solanke, an analyst in Lagos for Moscow-based Renaissance Capital, said by phone. Lending to those consumers “is where the low-hanging fruit is.”
Nigeria, boasting the continent’s largest population at about 170 million, has drawn investment from Bob Diamond’s Atlas Mara Co-Nvest Ltd. (ATMA) and Qatar National Bank QSC as economic growth in the West African country outstrips that of nations in eastern and southern Africa. Even so, valuations on banking assets are some of the cheapest on the continent as
regulators force banks to reduce fees and increase capital.
“In West Africa, especially Nigeria, valuations have become ridiculously cheap versus the entire sub-Saharan Africa,” Kato Mukuru, head of equity research for Exotix Partners LLP, said by phone from New York. “With banks in Nigeria there’s more size, less penetration and a much richer government. If people aren’t careful, they’ll miss the boat.”
With profitability falling, the Nigerian Stock Exchange Banking 10 Index has dropped 16 percent this year. Fitch Ratings expects Nigerian banks’ “performance and growth” to slow more in 2015. Sixty-three percent of publicly traded Nigerian banks trade below their book value, John Storey, a Johannesburg-based analyst at Bank of America Corp., estimates.
Diamond’s Atlas
Nigerian banks have an average price-to-earnings ratio of 4.6. By comparison, the FTSE/NSE Kenya 15 Index has risen 20 percent, with Equity Bank Ltd., Kenya’s biggest lender by market value, climbing 58 percent on a PE ratio of 11.7.Atlas Mara, founded by Diamond, former head of Barclays Plc, increased its stake in Union Bank of Nigeria Plc in September to almost 30 percent. In the same month, Qatar National Bank bought more than 20 percent of Togo-based Ecobank Transnational Inc. (ETI), which operates in Nigeria and another 35 African countries. Johannesburg-based Nedbank Group Ltd. (NED) took up 20 percent of Ecobank on Oct. 2. The bid premium on the first two deals was about 30 percent, Bank of America research shows.
“We consider a strong presence in Nigeria as a key pillar of our strategy,” John Vitalo, chief executive officer of Atlas Mara, said in e-mailed comments. “The robust projected GDP growth, the increasingly diversified economy, the ongoing emergence of a sizable middle class and numerous opportunities to enhance financial inclusion through the innovative use of technology are all long-term drivers of growth in the banking sector.”
Top Stocks
Guaranty Trust Bank Plc and Zenith Bank Plc (ZENITHBA) are Bank of America’s top stock picks in the country, while First Bank of Nigeria Plc and United Bank for Africa Plc are rated underperform. The four lenders account for more than 50 percent of Nigerian bank assets, according to Storey.Even assets once considered toxic are finding takers. Nigeria’s Asset Management Corp., set up in 2010 to buy bad loans from lenders amid a banking crisis that began in 2009, sold Mainstreet Bank Ltd. to Skye Bank Plc (SKYEBANK) last month and Enterprise Bank Ltd. to a unit linked to Heritage Banking Co.
In East Africa, Kenya, which is developing oil fields and investing in infrastructure, has also attracted foreign interest. London-based Prudential Plc (PRU) bought life insurer Shield Assurance Co. in September and Old Mutual Plc (OML) acquired lender Faulu Kenya Ltd. in 2013. Kenya’s economy was measured at $55.2 billion last year, about one 10th the size of Nigeria’s, its statistics agency said.
“It’s extremely competitive and expensive in Kenya,” said Mukuru at Exotix Partners. “There are 24 banks in Nigeria and over 40 in Kenya.”
Ebola, Militants
Nigeria’s economy is set to grow 7.2 percent next year, outstripping Kenya at 5.8 percent and South Africa with 2.5 percent, Standard Chartered Plc forecasts show. Although Nigeria’s equity valuations look cheap, investors wrestle with local and regional risks. Boko Haram, the Islamist militant group based in northeastern Nigeria, has killed more than 13,000 people since 2009, according to President Goodluck Jonathan. Other West African countries including Liberia and Sierra Leone are contending with the worst outbreak of the deadly Ebola virus on record.Investment Impact
“It will have a negative impact on economic growth in the region” and make it difficult to motivate investment, Ben Kruger, joint chief executive officer of Standard Bank Group Ltd., said in an interview with Bloomberg Television on Oct. 28.Nigeria, which recorded 20 cases of Ebola and eight deaths, was able to contain the virus and presents a good example of how to counter the disease, he said.
Nigeria, Africa’s biggest oil producer, also poses a currency risk. The naira weakened to record levels against the dollar this year. It dropped for nine consecutive weeks until Oct. 24, under the strain of lower oil prices. Brent crude traded at a four-year low of $82.19 today, having dropped about $30 from a high in June. The naira fell 0.3 percent to 166.45 per dollar as of 10:35 a.m. in Lagos, the commercial capital.
Missing: Belief
Risks notwithstanding, Nigerian lenders may experience a more than 30 percent increase in their valuations, Storey said. “Short-term headwinds are set to continue, but the multi-decade growth story is appealing.”
McKinsey & Co. said in a July report the West African nation could be one of the world’s top 20 economies by 2030, with a consumer base bigger than the current combined populations of France and Germany.
“It’s amazing how the market doesn’t want to recognize this,” Mukuru said. “What’s missing in Nigeria is belief.”
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