June 25, 2024
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The NGX Banking Index dropped 7.35% last week, with major banks like UBA and FBN Holdings suffering double-digit losses. 

Investor concerns about Central Bank recapitalization plans are causing skepticism about raising N3 trillion, leading to depressed share prices. 

Despite record profits and high dividends, bank stocks are falling due to the impact of rights issues and high trade volumes at lower prices. 

Nigerian banks appear poised for another round of losses as investors continue to weigh their options regarding the impending bank recapitalization plans. 

The NGX Banking Index fell sharply at the end of last week, shedding a whopping 7.35%, one of the worst weekly performances this year. 

Aside from Stanbic IBTC, all the major banking stocks posted losses, with UBA, FBN Holdings, and ETI shedding 12%, 10%, and 10%, respectively. UBA and Zenith Bank closed the week at a year-low of N19.2 and N30, respectively. 

A worried investor who messaged Nairametrics opined, “The Central Bank recapitalization policy has decimated bank stocks. How can they raise N3 trillion at these valuations? Investors are spooked, and I doubt the capital raise will be successful.”

Month-to-date, banking stocks are down 5.29%, 28.77% for the quarter, and 18.26% year-to-date. This is a stark contrast to the end of the first quarter of the year when banking stocks were up 14.76%. 

Banks like Access Holdings are trading below their earnings per share, delivering a price-to-earnings multiple of 0.837x. UBA, with a price-to-earnings multiple of 0.96x, is also trading below its earnings per share. Zenith Bank, which is trading at its year low, has a borderline 1x multiple to its earnings. 

The sell-offs are all the more remarkable when you consider the massive profits being declared by Nigerian banks and the record amount of dividends being paid.

However, it appears investors are more concerned about the spate of rights issues planned by commercial banks as they struggle to meet their banking recapitalization targets. 

Most banks have announced plans for rights issues, which many investors view as a major first step toward achieving their recapitalization goals. Investors with knowledge of the situation opine that the strategy of raising capital via rights issues may be the major reason why the share prices are depressed. 

Rights issues are typically capital raises that only allow existing shareholders to exercise their rights by purchasing the shares of the company.

This suggests that a lower share price might be favourable to insiders, especially those with majority control, even though it could lead to the creation of more shares. 

For example, for Access Corporation to raise N300 billion via a rights issue, it would have to sell 18 billion shares at the current share price of N16.4 versus just 10 billion shares if it sold at its year high of N30 per share. However, this means investors will pay nearly twice the current share price of N16.24. 

Most rights issues are also priced at a discount to their current share price, even as existing regulations do not require the trading of the stock to be suspended. This suggests the rights issue price could initially be lower than the current share price. 

Another reason given by some analysts is the amount of dividends declared by most banks, which have been in record figures. For example, Zenith Bank declared about N100.4 billion in dividends in 2023 compared to N125.5 billion declared this year already.  

GTCO also declared N94 billion this year versus N91 billion a year earlier. UBA also declared N95 billion in dividends this year versus N37.6 billion reported a year earlier.

Fidelity Bank, which plans to raise about N370 billion, also declared dividends of N27.2 billion this year versus N22.4 billion in 2023. 

This perhaps explains why bank share prices have plummeted in recent weeks and could fall further as the rights issue dates are confirmed and selling prices revealed. 

Most analysts also suggest some of the dividend payouts may be reinvested in the company by the beneficiaries in the form of subscribing to their rights issues.

Just last week, the chairman of UBA, Tony Elumelu, promised to invest his entire dividend in the rights issue. Most bank majority shareholders are expected to do the same. 

While this benefits the market, especially retail investors, the adjustments of share price following dividend payments also add to the pressure on their share price as they achieve lower lows. 

One other concern some investors have is that most bank stocks are not just experiencing a price decimation, but they are also doing this at a higher volume of trade, which suggests even lower prices. 

For example, FBNH traded 20.4 million shares on Friday at a lower price close. Zenith Bank, UBA, and ETI also experienced a similar trend.

For instance, ETI recorded a volume of 554.9 million shares on Friday at a closing price of N21.65, compared to the previous day’s volume of just 347,214 shares at N24.05. This suggests there are likely more sellers in the market than buyers. 

As one analyst stated in a message to Nairametrics, “It is not whether bank stocks will keep falling, it is how low can it go”. 

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