Equity Analysis /

Banks: Valuations are still compelling despite the rally

    Rahul Shah
    Rahul Shah

    Head of Corporate & Thematic Research

    Rohit Kumar
    Rohit Kumar

    Global Financials/Thematics

    Tellimer Research
    3 February 2020
    Published byTellimer Research

    We continue to see good value in the sector, with most of our coverage still trading at a discount to history. Even after incorporating (typically more conservative) third-party inputs into our valuation models, we see good investment returns at BRAC BD, CIEB EY, VPB VN, VTBR RX, ZENITHBA NL.

    Our banks coverage is still cheap in a historical context, trading at a roughly 15-20% discount to 5-year trailing PE and PB averages. Africa is the most heavily discounted region, notably Uganda, Tanzania, Ghana and Rwanda. In Asia, Bangladesh and Sri Lanka are standouts, while in LatAm we highlight Argentina. Non-covered markets trading historically cheap include Cote d’Ivoire, Lebanon, Mexico, South Korea.

    We see meaningful upside from current levels. Our coverage is trading on 5.7x 2020f PE, 1.0x PB and 5.3% DY for a prospective ROE of 16.3%, and we see median 19% share price upside over the next 12-months.

    Five names that scan incredibly cheaply on fundamentals:

    • BRAC BD: Best-in-class management, margins, asset quality, funding and capital strength, together with a meaningful stake in the country’s largest mobile money platform, bKash. The stock is fully pricing in an aggressively implemented loan rate cap, which we think is unlikely.
    • CIEB EY: Most profitable listed Egyptian bank with superior margins, good cost control, disciplined risk management; complemented by a high dividend. Less exposed to withholding tax changes. Given COMI EY’s strong run, we see scope for investment inflows to this name.
    • VPB VN: Market-leading consumer credit arm (FE Credit) helps VPB generate class-leading ROE, which in turn keeps capital ratios healthy. We think volume growth will recover from H1 18’s slowdown, while a potential listing of FE Credit will help to improve transparency.
    • VTBR RX: Second largest Russian bank with scope to benefit from national infrastructure projects given its state backing. Margins should pick up as interest rate cuts help lower funding costs, while a recovery in the dividend payout should also boost sentiment.
    • ZENITHBA NL: Second largest Nigerian bank, with strong capital ratios, good provisions coverage and high profitability, supporting an attractive double-digit dividend yield. We think these positive attributes can be sustained despite regulatory uncertainty and a weak macro environment.

    The first three of these names are also within our overall sector top picks (which consider a broader range of factors than just valuation).

    Cleaning out the data to find true value. We assess whether our targeted share price upside could be a function of overly optimistic valuation model inputs. Using more conservative third-party inputs, potential sector upside falls to 9% (ie an 10ppt reduction). We would continue to see good value in Nigeria and Vietnam banks, but Pakistan no longer looks so compelling.

    Key sensitivities. For our coverage universe, a 1ppt increase in COE lowers our fair value estimate by 12%. A 1ppt increase in sustainable ROE raises fair value by 10%. A 1ppt increase in terminal growth rate raises fair value by 1%.