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WHY SHOULD YOU HAVE BANKING STOCKS IN YOUR PORTFOLIO?

By Folarin Adedeji on March 12, 2012

Adam smith in his book titled “wealth of nations” defined a bank as “an institution that doesn’t deal with money rather our toil and trouble. Banks deal in toil and trouble. Banking is a clever device for storing your toil and trouble. And instead of being charged storage fee, you are compensated for engaging in excess toil and going to extra trouble”.

Look around you, where is your money? You obviously have a bank account with one of the 20 banks in Nigeria, be it a saving, fixed deposit, current or business account. Where else would have your money kept? In your house, in a safe at the office, or in your garden buried below the earth surface, where there is no guarantee of safety. The bank takes your money at a cheaper rate lends it out at a higher rate and make a margin of profit from the difference. Money you got from toiling and trouble, activities you made, either as an employee or an employer both ways your sweat and hard work. Nigeria as a whole is poised for growth, as we emerge as a nation on the edge of development, there will be more activities as it relate to wealth creation of new money. Therefore I can say the more money we make as a nation the more capital your bank gets. They don’t need our money sitting around in their vault idle but render a greater part of that capital active and productive for more profit by lending. Therefore, owning a piece of these banking stocks on the NSE is a sure way to exposure your portfolio to the growth potential of Nigeria as a frontier market on the verge of a becoming an emerging market.

The business model of banking is for wining, they never lose, don’t get twisted. It’s kind of an image thing for the central bank because banks reflect a mirror image of the economy they conduct businesses in. In today’s world of modern finance, when they make a loss they get bailed out. Billions of dollars are re-injected into them to come back alive, back stronger to fulfill their central bank given purpose of making more profit. The central bank provides them with liquidity (cheap money), either they print this money or take from the nation’s purse that belongs to you and I, giving it to the banks at a ridiculous low rate and lending it back to us at a much higher rate. Our own money!, at a much higher rate to make profit off us…interesting. Banks in Nigeria were bailed out to the tune of 21 billion dollars! Yes! 21 billion dollars!! This is not only peculiar to Nigeria alone; bailouts were conducted from the sick economies of the west to the emerging markets in the east.

This year in Europe over 700 banks got money from the Europeans central bank to the tune of over 1 trillion dollars!!! In a deal it called LTRO, long term re-financing. Blah blah blah!. In the end when all the chips are down be rest assured that if you own stocks of any bank that goes under the government would always give it an open cheque to start over again even stronger.

Further more, on a lighter note. Have you seen the stock prices of banks in Nigeria on the exchange? They are cheap and under valued, best time to buy them I will explain. Using today’s stock price to book value ratio (P/BV). Book value is when the total liability (debt) of a company is subtracted from the total value of tangible asset (i.e. things that the company own that can be easily be sold or converted to cash). If company XYZ is trading today at N20 per share on the stock exchange, owes a debt of N100million and owns prime properties of about N300million. Subtracting total debt of N100 million from the value of sellable properties of N300million, we are left with a cool net asset of N200million. If we were to divide the N200 million by the number of outstanding shares (out standing share is the total number of shares of company XYZ that is traded publicly everyday on the Nigerian stock exchange). If Company XYZ has a total of 20million unit of tradable share on the exchange, then we have N200million/20million a value of N10 per shares. Therefore, the book value price per share is N10. Then we divide Today’s stock price of N20 / book value per share of N10 = N20/N10 = 2X, we can say company XYZ is trading at twice the value of it’s net worth on the exchange i.e 2X.

In relation to today’s banking stock, the likes of First bank are trading at 1.25X i.e 1.25 times the value of its net worth, like wise Access bank at 0.53 times the value of it net worth (source – NSE, meristem securities). This is rather low and shows they are undervalued. In the days of economic boom these same stocks were trading as at over 20 to 30 times their net worth. The only place for these stocks to go is up.

In conclusion, the markets today present a lot of good opportunity for those who want to own equities for the long term. Banking stocks are underpriced at the moment and fundamentally undervalued, presenting you the opportunity of a life time.

Nigerian Banking Stocks