Since the announcement of the banking recapitalization exercise by the CBN, investors in the NGX have reacted, albeit in a pessimistic fashion.
Recall that on March 28, 2024, the CBN revised the minimum capital requirements for banks. And since then, the market capitalization of banking stocks in the NGX has declined by 26.7%. Between March 28 and April 18, the cumulative market cap of banking stocks in the NGX declined from N8.08 trillion to N6.34 trillion.
The biggest losers within this period were GTCO Holdings which lost 34.57%, with its share price declining from N52.5 to N34.35. Access Holdings has lost 29.59%, with its share price moving from N24.50 to N17.25.
Other significant losers are FBNH, Sterling Holdco, Zenith Bank, and UBA, whose share prices have declined by 24.2%, 21.3%, 19.1%, and 18.9% respectively. This scenario offers insight into investor sentiment towards banking equities since the announcement of the recapitalization exercise.
Experts who spoke reacted to the development, provided different thought positions.
A Senior Analyst with CardinalStone Securities, Adebayo Adebanjo, attributed investors’ sentiments to “market worry”. He pointed out that the impact stems from the shareholding dilution resulting from capital raises through rights issues.
Although banks have a two-year deadline to shore up their capital bases to meet the minimum capital requirements, banks listed on the NGX have started making efforts to increase their paid-up capital through capital raises.
For example, UBA, Zenith Bank, FBN Holdings, GTCO Holdings, and Access Holdings have announced upcoming rights issue programmes.
“Basically, the market is worried. In the short term, there’s going to be a significant dilution of shareholding. The market is not very thrilled about the dilutive effect.”
“Ultimately, as soon as they raise that money and are able to put it to good use, it should contribute the earnings in the long term. That’s when the benefits of the capital raise will begin to reflect.”
Engaged with some retail investors in the NGX who held shares in various banking stocks to gauge their response to these rights issues.
A retired civil servant, Mrs Alabi (not real name), expressed sentiments of a shareholding dilution that the rights issues will create.
“What I am doing presently is selling the ones (banking stocks) I have right now, so I can reinvest and buy more when the price is down.”
The bearish sentiment of banking equities since the announcement of the recapitalization exercise has reflected in the NGX within the timeframe. Since March 28, the NGX’s All Share Index has declined by 4.51%, reaching 99,845.91 points on April 18, from 104,562.06 points on March 28.
Magreola noted, “Since the MPR was jerked up by 400 basis points by the CBN Governor in February, the whole equity market has been at risk of a negative turnout. Over the years, there’s been a strong inverse correlation between the fixed income market and the equities market.”
He continued, “Once rates become high and investors can get risk free returns north of 15% in the fixed income market, we tend to see a negative turnout for the equities markets, as investors would generally sell out of their equities positions to pick up risk-free returns in the fixed income market. And this year won’t be an exception.”
Magreola asserted that the reaction to the high yields in the fixed income market was “quite slow”, noting that most investors were waiting to earn their dividends.
“It is currently the earnings season for the financial year 2023, so most investors want to wait it out a bit to earn their dividends or capital gains on the back of dividend announcement before rotating out of the equities market into the fixed income space.”
Oluwaseun Magreola, formerly a portfolio manager at Meristem Wealth Management, underscored the significance of prospective mergers and acquisitions within the banking sector in influencing the performance of banking stocks.
“With a prospective strike price set for surrendering their shares in exchange for shares in the larger entity, investors have a chance to benefit. However, it’s important to note the extended timeframe of 24 months for these developments to materialize.”
