Equity Analysis /

The sale is on: Buy NGA and PAK banks

  • Top overall picks: Bank Alfalah, BRAC Bank, KCB, VPB, Zenith.

  • Regional preferences: Nigeria in Africa, Pakistan in Asia.

  • The profitability cycle is a key driver of sector valuations. 

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Rahul Shah
Olabisi Ayodeji
Phuong Pham
Tellimer Research
25 September 2018
Published byTellimer Research

Within our coverage universe of 60 names we highlight top quality franchises at attractive prices using several different selection approaches.

Top overall picks: Bank Alfalah, BRAC Bank, KCB, VPB, Zenith. We think these five names will deliver median 43% upside over the coming 12 months. They are currently valued at 6.1x 2019f PE and 1.1x 2018fPB. Median 2019f ROE is 21.1%, and we expect 14% earnings growth that year. (page 4 and page 32)

Regional preferences: Nigeria in Africa, Pakistan in Asia. Nigerian banks appear extremely attractive given favourable oil price and risk cost trends. Banks in Pakistan should benefit from higher margins, while volume growth should remain robust. In both markets, bank shares are not pricing in our expectation of resilient future profitability. We see 46% average upside for tier 1 Nigerian banks and 37% upside for Pakistan banks. We upgrade Stanbic IBTC to Buy from Hold. (page 5)

The profitability cycle is a key driver of sector valuations. We estimate in-market banking sector PE and PB multiples can vary by 30-50% across the investment cycle. Our analysis suggests Nigerian banks should trade at a premium, given our expectation for broadly unwavering profitability over the medium term; instead they trade at a sizeable discount. Provided our assessment of the Nigerian banking profit cycle is correct, this suggests there is significant upside for these names. (page 20)

Six strategies: For those with differing investment criteria we identify six strategies and pick our preferred stocks for each.

1) Finding comfort with the unloved: MSCI EM and MSCI FM indices have fallen 10-15% YTD. Sector weakness has been concentrated in Bangladesh and Nigeria, while Uganda, Kuwait and Ghana have outperformed. (page 15)

2) Seeking support in dividends. For investors seeking income to protect against further equity market headwinds, we highlight Zenith, UBA, Access, FCMB (Nigeria), KCB (Kenya), Bank Muscat (GCC) and ABL (Pakistan), which on average, deliver 9.4% prospective dividend yield. These are banks with solid franchises and healthy capital ratios, with dividend cover averaging 2.4x. (page 16)

3) Identifying where balance sheet risks have been excessively discounted. Over 40% of our coverage universe is trading at a discount to book value. Focusing on discounted names with profitable core businesses and sizeable capital cushions, we believe investors are pricing in an excessively negative asset quality scenario at Zenith, Access, DTB and HNB. We think share prices for these names are factoring in a more than doubling of NPLs, which we view as unlikely. (page 18)

4) Hedging currency exposures. Names with the biggest net long FCY positions include NMB (Tanzania), GTB (Nigeria), Attijariwafa (Morocco), CIB (Egypt), SBMH (Mauritius), HBL (Pakistan) and CTG (Vietnam). (page 22)

5) Backing the winners from growing retail penetration. Account penetration in our covered markets stands at 34%, versus 94% in high income countries. Key vehicles to play this structural growth story include: BRAC Bank (Bangladesh), Equity Group (Kenya), FBNH (Nigeria) and VPB (Vietnam). (page 24)

6) Countering consensus. We are more bullish than consensus on BID and STB (Vietnam), Barclays and KCB (Kenya), Alfalah and Allied (Pakistan) and Diamond (Nigeria). We are more cautious than consensus on VCB (Vietnam), Fidelity and FCMB (Nigeria), Bank of Kigali (Rwanda) and Coop (Kenya). (page 29)