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Investec Lured by Nigeria Banks on Rebound From Discount

Central Bank Governor Lamido Sanusi
The Central Bank of Nigeria, led by Governor Lamido Sanusi, fired the heads of eight banks four years ago, pumped 620 billion naira ($3.9 billion) into ailing lenders and created a state-owned company to buy bad debts to stabilize the industry. Photographer: Jason Alden/Bloomberg

Aug. 16 (Bloomberg) -- Nigerian banks are rebounding from a record discount to lenders in South Africa as growth prospects for the continent’s two largest economies diverge. Investec Asset Management says the rally has further to run.

The Nigerian Stock Exchange Banking 10 Index has increased 19 percent this year compared with a 3.4 percent drop for South Africa’s six-company FTSE/JSE Africa Banks Index and a 8.2 percent decline for the MSCI Emerging Markets Banks Index. South African lenders trade at a premium of 2.4 times to their Nigerian peers on a price-to-book basis, down from a record 2.7 times in January.

Guaranty Trust Bank Plc to Ecobank Transnational Inc. and Zenith Bank Plc are benefiting from financing oil, gas and power projects in Nigeria while bad debts fall as the International Monetary Fund predicts Africa’s second-largest economy will grow 7.2 percent this year. In South Africa, consumers are struggling to repay loans, curbing profit at companies including Standard Bank Group Ltd. as the jobless rate climbs and the IMF forecasts 2013 growth of 2 percent, the slowest since the 2009 recession.

“Nigerian banks do look favorable,” Mishnah Seth, a banks analyst at Investec, which manages the equivalent of $105 billion, said by phone from Cape Town Aug. 8. “From a valuation perspective they’re cheaper” than their South African peers. “They’ll give you superior growth” over the next two years, she said.

Nigerian lenders are extending a second year of gains after a debt crisis in 2008 and 2009, sparked by loans that soured after speculators wrongly bet against an increase in equities. The Central Bank of Nigeria, led by Governor Lamido Sanusi, 52, fired the heads of eight banks four years ago, pumped 620 billion naira ($3.9 billion) into ailing lenders and created a state-owned company to buy bad debts to stabilize the industry.

Leading Gains

The benchmark banking index sank 34 percent in 2009, rose 26 percent the following year than dropped another 32 percent in 2011 before advancing 24 percent last year. United Bank for Africa Plc is leading gains this year with a 78 percent increase followed by Union Bank Nigeria Plc and Diamond Bank Plc. Skye Bank Plc is the only lender in the index to retreat in 2013.

Nigeria’s publicly-traded banks are set for profit growth of about 20 percent a year over the next two to three years, Investec’s Seth said. That compares with estimated earnings growth this year of 9.8 percent at Johannesburg-based Standard Bank, which owns Nigeria’s Stanbic IBTC, and 13 percent growth for 2014, according to data compiled by Bloomberg.

Asset sales and expansion plans are buoying demand for Nigerian banks. The government of Africa’s top oil producer is selling stakes in power plants and transmission and electricity distribution companies spun out of the former state-owned utility.

‘Pretty Expansionary’

Phone companies, including MTN Group Ltd. and Globacom Ltd., plan to invest at least $5 billion in Nigeria in anticipation that the market, already Africa’s biggest with 114 million subscriptions, will expand to 200 million by 2017, according to Informa Telecoms & Media estimates.

“There’s a lot for the banks to do,” Ronak Gadhia, an African equity analyst at Exotix Ltd., said by phone from London. “Telecommunication companies are pretty expansionary, oil and gas still needs quite a lot of investments.”

South African banks deserve to trade at a premium to lenders in Nigeria because of the West African nation’s regulatory environment, Peter Mushangwe, an analyst at Johannesburg-based Legae Securities, said in an e-mailed response to questions.

“We view 2012 as having been largely a recovery phase, which includes earnings recovery and stability to asset quality, but we are not yet in a normal valuation phase, as is the case with South African banks,” he said. “It will come but it may take its time.”

Regulatory Changes

Nigeria’s central bank introduced a 50 percent cash-reserve requirement on public sector funds on July 23 after highlighting the risk of excess liquidity in the banking system. The regulation, which applies to about 1.3 trillion naira of deposits, could result in 500 billion naira of liquidity being withdrawn, increasing funding costs and hurting profitability, Fitch Ratings said July 31 in a statement.

Investors are overlooking other risks such as Islamist militants, who have killed thousands of people in northern Nigeria and attacked oil and communication facilities, to gain a foothold in a country at a different stage of development.

The gross domestic product of Nigeria, the continent’s most populous nation with more than 160 million people, may exceed that of South Africa by 2016, according to Renaissance Capital, the investment bank owned by Russian billionaire Mikhail Prokhorov. Currently, Nigeria ranks 139th out of 174 countries in Transparency International’s Corruption Perceptions Index, compared with 69 for South Africa.

Price Discount

Barclays Africa Group Ltd., which owns South Africa’s Absa, the nation’s third-largest lender, trades at about 11 times profit, on par with Nedbank, the fourth-largest. Guaranty, Nigeria’s largest, has a price-to-equity ratio of 8.2, compared with Ecobank’s ratio of 4.6. Nedbank has an option to buy 20 percent of the Lome, Togo-based Ecobank. The banks all declined to comment or didn’t immediately respond to requests for comment on valuations.

Even with tighter monetary policy, Nigerian lenders are forecasting loan-book growth of 20 percent this year, Gregory Kronsten and Olubunmi Asaolu, analysts at FBN Capital Ltd. in London, wrote in an Aug. 5 note. “More rapid growth would in our view potentially create a bubble reminiscent of 2007 and 2008,” they said.

Impaired Records

Standard Bank increased its loan book by 12 percent in the first half, while losses on bad debts soared 29 percent, the Johannesburg-based company said in a statement yesterday, without giving estimates on growth. Nedbank sees an increase of 5 percent to 10 percent in loans in the second half, the lender said Aug. 6. Barclays Africa on July 30 forecast “mid-single digit loan growth” this year. Poor asset growth is a key risk to South African lenders’ earnings, Legae’s Mushangwe said.

The number of South Africans with impaired credit records rose by 189,000 to 9.53 million in the first quarter, the National Credit Regulator said in June.

In Nigeria “credit risk is still not significant given the clean up that they did in the crisis,” Exotix’s Gadhia said. “Profitability should remain fairly strong.”

To contact the reporters on this story: Chris Kay in Abuja at ckay5@bloomberg.net; Jaco Visser in Johannesburg at avisser3@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net

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