New Telegraph

Recapitalisation: Investors, shareholders position for banks’ stocks

With the expected enhanced capital base of banks, shareholders and investors are positioning for the lenders’ stocks. That is as they look forward to improving their financial fortunes, brought about by the Central Bank of Nigeria’s induced recapitalisation. The shift in preference towards the stocks, according to analysts, is buoyed by over N4 trillion expected to be raised from the capital market by the banks, following the exclusion of the retained earnings by the CBN in the computation of capital base.

Already, banking stocks have been performing exceptionally well despite a mass exodus of investors toward fixed instruments like Treasury Bills (NTBs), Federal Government bonds that are offering higher yields following a massive hike in the Monetary Policy Rate (MPR) by CBN recently. For instance, at the trading on the NGX of April 9, 2024, the All-Share Index (ASI) extended its downward trend, shedding 445.24 points to settle at 103,736.08 points.

This marked a decrease from the prior close of 104,181.32 points. Consequently, the total market capitalisation witnessed a substantial drop of N251.74 billion, concluding at N58.653 trillion, reflecting a 0.43 per cent dip from the preceding value of N59.905 trillion. Incidentally, even with the decline in the overall activity, there was a significant surge in the volume of shares traded with an increase of 82.7 million shares.

According to NGX, leading the charge in trading volume was Zenith Bank with a remarkable 161.68 million units, followed by GTCO with 54.36 million units. Notable performances were also seen in UBA, with 47.82 million units, ACCESSCORP with 40.88 million, among others.

In terms of value of stocks traded, there was an impressive increase of 75.75 per cent, equating to an additional N6.73 billion, culminating in a total trading value of N15.64 billion for the session. Zenith, GTCO, UBA and ACCESSCORP, also led the pack. John Agbo, chartered stock broker, observed that the recapitalisation policy would intensify the attractiveness of the banking sector for investment, especially for those banks already benefiting from excess liquidity and high return on investment.

Explaining further, Agbo said: “In the long run, we would see that the enhanced capital base would have to be utilized to further enhance the returns of investments by the investors as the money is not just going to sit down in the banks’ balance sheet. “Ordinarily, the fact that the share capital is increasing should lead to a reduction in Earnings Per Share (EPS), but banks are going to avoid that by giving out more loans and being able to get more returns in increasing their earnings to shareholders. “At the end of the day, shareholders might start to favour bank stocks over other companies.

The situation has already started playing out as you can observe at the daily trading on the Nigerian Exchange Group, (NGX). For example, we have more liquidity in the banking stock than any other stocks right now.” Segun Adams, a research analyst at Afrinvest Consulting said: “Yields in the secondary fixed income market have risen around 230bps since the MPC resumed interest rate hikes in February. While the broad equities market gained 2.5 per cent, banking stocks outperformed the stock market by 3.5 xs. A key reason is anticipation of strong trading and investment income owing to the elevated yield environment.

More recently, the sector has been weighed on by concerns due to restrictions around the recapitalisation policy and other policies from the CBN that might constrain earnings, as the apex bank attempts to sanitise operations of lenders. The tight interest rate environment will affect the affordability of credit to the real sector and intensify risk for lenders but should have no bearing on bank’s ability to recapitalise given the two-year window.” Victor Ogiemwonyi, retired investment banker and a former council member of the Nigeria Stock Exchange (NGX), speaking in favour of the retained earnings as directed by CBN said: “In fact, my position on retained earnings is that CBN is right to exclude them. They are adjustable against interest earned on loans in the case of banks and the decision to keep them as retained earnings in the balance sheet, cannot now be suddenly changed because the CBN has called for recapitalisation. The CBN’s desire is to have a proper recapitalisation exercise and not window dressing.”

According to Ogiemwonyi, while bank recapitalisation can curb inflation in the short-term, it might also cause inflationary pressure in the long term as money supply increases in the country. His argument is that expanding the capital base of banks will result in a considerable increase in credit to the private and public sectors, adding, “the more the capacity of the banks to increase credit, the more likely the government can rely on domestic lending environments to fund the deficit of its budget.

According to Friday Ameh, a Lagos based energy analyst: “Growing the Nigerian economy from a $242 million to a $1 trillion will significantly increase the banks’ spending base, a situation that will continue to endear their (banks’) stocks to investors and shareholders.” Meanwhile, credit ratings agency, Agusto and Co. projected that affected banks may need to raise up to N4 trillion of inflow to meet the new CBN’s capital requirements.

The report therefore predicted Mergers and Acquisition (M&A) could be required for some banks that may find it difficult to meet the apex bank’s capital requirement. It further argued that the trend, occasioned by the CBN induced recapitalisation, underscores the pivotal role of the market as a gauge of economic health, particularly in the face of inflationary pressures and currency devaluation. Consequently, it further said that the prevailing share prices mirror the broader economic dynamics, with high inflation and devalued currency translating into elevated prices of goods and services, including shares. Emphasising the importance of fundamental strength, they concluded that stocks backed by robust fundamentals are poised to withstand inflationary pressures effectively, urging NGX to live up to expectations of Nigerians during listing and after.

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