PEG RATIO REVEALED VALUE STOCKS IN NIGERIA BANKING INDUSTRY

It is a common saying that an investment is made against future expectation therefrom. In plain language, the price we are ready to pay for an investment today (stock, land, car, house, etc) is based on how much value we intend to extract therefrom in a short, medium or long timeframe. Such expectation is however not guess work, as it comes with careful analysis of the investment’s past and present situation, so as to project the future value.
In the case of a company we look at its growth trend and capacity to drive earnings power and thereby supporting price which makes the difference, apart from dividend payment which PEG analysis metric do not put into consideration.

Nigeria’s banking stocks recently suffered pull-back as a result of corrections and profit taking in the sector by investors, after it had led bull-run since the beginning of the year to surpass the NSE’s benchmark index as the market and economy continued to recover.  Importantly, the decline in inflation rate from 18.55% in January 2017 to 16.01% in August and the exit of the nation’s economy officially from recession as shown in its Q2 GDP growth of 0.55% for the period, have not reflected in banks non-performing loans that continues to remain high. This has dimmed the otherwise positive quarterly earnings from the sector which is trending up, especially for first tier banks, a situation that continues to offer some form of confidence to investors, especially given that many of the first tier banks will beat expectations of the market and analysts.

Despite the strong apathy for credit risk assets, banks within the first half of the year recorded an average growth of 37.6% in interest income which was supported by a high yield environment as the government continued to crowd the financial market with securities at a relatively higher interest rate.
We however expect the banks to continue benefiting from attractive yields on fixed income, as a result of which we project an average growth of 29.0% YoY in interest income across the banks in 9M’17.
In recent times, the CBN phased out the one-year OMO (Open Market Operation) bills which moderated yields in the fixed income space, with yields on 364-days bills down by 400bps in the last one month. However, we believe the impact will be negligible on the Q3’17 performance, given that the easing started in the last month of the third-quarter. Should the Central Bank of Nigeria successfully sustain its ongoing effort, the impact on interest income may become significant from Q1’18. Also banks with strong FX liquidity would continue enjoying derivative income in Q3’17. For non-interest income, we expect UBA, ZENITHBANK and ACCESS to continue to report strong numbers from derivative transactions, given their strong dollar liquidity on the back of their recent Eurobonds Issuance in the last few months. Also, with the overall improvement in FX supply both at the interbank and Investors & Exporters (I&E) window, we expect a spike in income from trade related transactions to consequently boost non-interest income for the period.

Majority of economic data and indices released so far point to an economy recovering from recession, which is expected to impact banking stocks at a time many of the banks remain undervalued, a situation that has continued to attract local and international investors to the sector, given its role as an agent of economic growth and development, which cannot be overemphasized, especially as the sector remains the engine room of any economy.
The table below shows the position of Nigeria bank stocks- weather overvalued or underpriced. PEG ratio >1 (more than 1) implies that the stock is overvalued, which simply means that the bank’s future earnings is not going to grow much and the stock may undergo a correction in price at some point.
PEG ratio =1 implies that the stock is fairly valued, given the expected growth rate.
PEG ratio of <1 (less than) means the stock is undervalued, as the market is currently underestimating its growth.
Negative PEG ratio: This could be the case where the current earnings are negative, or the future earnings are going to decline

Source: NSE, Company Reports and  Investdata Research 
Given that many of Nigeria’s banking stocks remain undervalued, investors should be guided, by the bank’s consistency in growing earnings on quarterly basis, in releasing numbers and growing dividend. Also important to this discussion is the trending pattern of individual stocks.