Today, the most aggressive banking institution when it comes to growth in Africa is Access Bank Plc Nigeria, the continent’s biggest bank by customer base. The bank is acquiring anything on its path as it scales its mission across the continent. Yet, despite the high octane activities, the bank has not returned superb values to investors. Using Nigeria as a case study, FCMB returned 80%, Zenith bank (33%) and UBA (21%); Access lost 16% of its value in 2020.
In the Nigerian Stock Exchange, Access Bank is worth N325 billion; GTB remains the leader at N974 billion. UBA is priced at 297 billion. So, two things are happening here:
- (1) the largest bank in Africa by customer base (Access Bank) has not translated the huge customer volume into a great valuation,
- (2) the largest Nigerian bank on geographical footprint (UBA) is yet to unlock great value on that playbook.
So, what can we learn from these cases on how Nigerian investors think?
Personally, I do believe that investors want to see profitability above everything in Nigeria. Your absolute revenue while great does not provide confidence to most investors; they want to see that you are making money because if you are profitable, you will live long as a business.
Another thing is cost: the most valued banks in the nation – GTBank, Zenith Bank – have superior cost-to-income ratios; those give investors confidence that management is well ahead on cost containment. Zenith Bank has a market cap of N832 billion in Lagos.
There is a big lesson here: few technology companies in Nigerian Stock Exchange (NSE) have done well. If you look carefully, most of those firms do not have superior profit margins. Profits provide the basis for dividends and with the share values muted for over a decade, most investors have been capturing marginal values via dividends. This is why I think modern startups may struggle in NSE as most investors expect a very low gestation period to profitability, and when companies do not deliver that, they are punished by pushing their stocks down.
The gestation period to profitability in a typical Nigerian startup is long. That long gestation is also the reason why many startups or small businesses collapse few years of founding. Typically, one way to deal with this is to raise capital, ramp up market entry to grow fast enough to attain profitability. But in our extreme volatile economy, if the timing is off by months, the company can collapse. You just run out of cash.
Access Bank has size now via customer base, Zenith Bank has profitability and GTBank has its cutting-edge technology with profitability. FCMB looks promising with the versatility in its product offering. UBA gives you the continental spread. But if you check everything, Nigerian investors are really interested in cost efficiency and profitability. If you can deliver both at the same time, your numbers will rise.---
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