Nigeria's economy is set to grow by 7.2 percent next year, but investors are wrestling with local and regional risks such as Boko Haram and the Ebola virus, which "will have a negative impact on economic growth in the region", Ben Kruger at Standard Bank says. Photo: AP
Nigeria's economy is set to grow by 7.2 percent next year, but investors are wrestling with local and regional risks such as Boko Haram and the Ebola virus, which "will have a negative impact on economic growth in the region", Ben Kruger at Standard Bank says. Photo: AP
A security officer checks a man outside the Nigerian Stock Exchange in Lagos. Photo: Reuters
A security officer checks a man outside the Nigerian Stock Exchange in Lagos. Photo: Reuters

Renee Bonorchis

LENDERS from London to Qatar are hunting for African banks to buy. No market is attracting more interest than Nigeria, where 35 million adults keep their cash at home.

“There are still massive opportunities when it comes to consumers, because lots of Nigerian banks haven’t even cracked the ice yet,” Adesoji Solanke, an analyst in Lagos for Moscow-based Renaissance Capital, said. Lending to those consumers “is where the low-hanging fruit is”.

Nigeria, boasting the continent’s largest population at about 170 million, has drawn investment from Bob Diamond’s Atlas Mara Co-Nvest and Qatar National Bank as economic growth in the West African country outstrips that of nations in eastern and southern Africa. Even so, valuations on banking assets are some of the cheapest on the continent as regulators force banks to reduce fees and increase capital.

“In West Africa, especially Nigeria, valuations have become ridiculously cheap versus the entire sub-Saharan Africa,” Kato Mukuru, the head of equity research for Exotix Partners, said from New York. “With banks in Nigeria there’s more size, less penetration and a much richer government. If people aren’t careful, they’ll miss the boat.”

With profitability dropping, the Nigerian Stock Exchange banking 10 index has dropped 16 percent this year. Fitch Ratings expects Nigerian banks’ “performance and growth” to slow more in 2015.

Sixty-three percent of publicly traded Nigerian banks trade below their book value, John Storey, a Johannesburg-based analyst at Bank of America, estimates.

Nigerian banks have an average price-to-earnings (PE) ratio of 5. By comparison, the FTSE/NSE Kenya 15 index has risen 20 percent, with Equity Bank climbing 60 percent on a PE ratio of 11.9.

Atlas Mara, founded by Diamond, the former head of Barclays, increased its stake in Union Bank of Nigeria in September to almost 30 percent.

In the same month, Qatar National Bank bought more than 20 percent of Togo-based Ecobank Transnational, which operates in Nigeria and another 35 African countries.

Nedbank took up 20 percent of Ecobank on October 2. The bid premium on the first two deals was about 30 percent, Bank of America research shows.

“We consider a strong presence in Nigeria as a key pillar of our strategy,” John Vitalo, the chief executive of Atlas Mara, said. “The robust projected gross domestic product growth, the increasingly diversified economy, the ongoing emergence of a sizable middle class and numerous opportunities to enhance financial inclusion through the innovative use of technology are all long-term drivers of growth in the banking sector.”

Guaranty Trust Bank and Zenith Bank are Bank of America’s top stock picks in the country, while First Bank of Nigeria and United Bank for Africa are rated underperform. The four lenders account for more than 50 percent of Nigerian bank assets, according to Storey.

Even assets once considered toxic are finding takers. Nigeria’s Asset Management, set up in 2010 to buy bad loans from lenders amid a banking crisis that began in 2009, sold Mainstreet Bank to Skye Bank last month and Enterprise Bank to a unit linked to Heritage Banking.

In East Africa, Kenya, which is developing oil fields and investing in infrastructure, has also attracted foreign interest. Prudential bought life insurer Shield Assurance in September and Old Mutual acquired lender Faulu Kenya in 2013. Kenya’s economy was measured at $55.2bn last year, about a 10th the size of Nigeria’s, its statistics agency said.

“It’s extremely competitive,” Mukuru at Exotix Partners said. “There are 24 banks in Nigeria and over 40 in Kenya.”

Nigeria’s economy is set grow by 7.2 percent next year, outstripping Kenya at 5.8 percent and South Africa with 2.5 percent, Standard Chartered forecasts show. But investors wrestle with local and regional risks. Militant group Boko Haram and the Ebola virus “will have a negative impact on economic growth in the region” and make it difficult to motivate investment, Ben Kruger at Standard Bank said last week. – Bloomberg