As I watch the massive dislocation between Nigerian banks’ profits and their market caps in the Nigerian Stock Exchange (NSE), I predict that by 2023, if Naira continues to fall, two of our five leading banks would be taken private. Yes, money men will buy them and take them private. My thesis is simple: if your annual net profit is about 30% of your market cap, the public market looks like a waste of time! This is the only way to fix this paradox: The Paradox of Bank Earnings in Nigeria states that the market performance of the banking sector is uncorrelated with improving revenue and profitability.
Zenith Bank market cap is N533.740 billion, but in H1 2020, it generated N104 billion net profit. If it repeats that for H2, you are looking at a net profit of N200 billion for 2020. Yet, the market is pricing the bank at N534 billion. Using simple equations we learnt in secondary school, and running some numbers, the bank is wasting time in the NSE. Of course, there could be regulatory requirements which may force it to be on NSE.
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Nigerians have about 36 trillion in banks with no where to invest it. Also the Nigerian Stock Exchange, the CSCS, the banks, Registrar and stock broking firms need to work together to digitize the process of investing and dividends payments in Nigeria. The e-dividends mandate process can be very frustrating. You have to fill a very long paper form and submit to the banks before your dividends are paid and you have to fill it for every stock you own. If the NSE digitizes its processes just like Robinhood mobile app used in the US, a lot of more capital will flow into the NSE from both Nigerians at home and in diaspora then Zenith Bank capitalization will increase. Also lots of awareness need to be created as lots of companies in the Nigerian Stock Exchange have dividend yeilds above that of tresury bills and bank deposits, even some Nigerians have lost money investing in ponzi schemes and fake cryptocurrencies. Nigeria is a nation with lots of “dormant capital”.
“If the NSE digitizes its processes just like Robinhood mobile app used in the US, a lot of more capital will flow into the NSE from both Nigerians at home and in diaspora then Zenith Bank capitalization will increase”…waiting for Nigeria’s Robinhood