Lucky Fiakpa
3 November 2008
analysis
Lucky Fiakpa writes that the banks that investors fell heads over heels to buy their shares during the banking consolidation exercise are today selling for less than the price of pure water and an investor can now acquire them with ease.
No one would have thought the shares of United Bank for Africa, UBA, First Bank, Union Bank, Zenith Bank, Guaranty Trust Bank, Intercontinental Bank, Bank PHB, Oceanic Bank and some of the elite banks in the country that so many people struggled hard to buy during their various public offers can be selling for peanuts in the market today.
These were some of the banks that investors fell heads over heels to buy their shares during the banking consolidation exercise. It even got to a point where millions of naira invested in buying some of the shares were returned to the investors with or without interest as a result of over subscription. Today for less than the price of pure water, an investor can acquire the shares of some of these elite banks with ease. How are the mighty fallen!
But rather than panic and be scared of the market, this seems to be the time the seasoned individual investor who has done his home work should move in and increase his holding of some of the best banks in the country. This is the time the seasoned investor should take the opportunity to buy that elite bank shares he could not buy during the banking consolidation due to its high price or limited quantity.
Taking the Opportunity
Goldman Sachs hit a 52 week high on October 31, 2007 at $250.70 per share. On September 18, 2008 the share had dropped to $86.31 due to market volatility. Goldman Sachs as an Investment Bank was not affected by the mortgage backed security instruments crisis in the US markets. Goldman had sold all its mortgage backed securities more than six months before other holders of the instruments realized that they were holding contaminated or toxic instruments that may be worth less than face value.
On Monday, September 22, 2008, the US Treasury and market regulatory authorities granted Goldman Sachs and Morgan Stanley, the two investment bank survivors of the current market carnage in the country rights to become bank holding companies. Within hours of the announcement, Warren Buffet, the world's most successful investor, pumped in $10 billion dollars into Goldman Sachs ($5 billion in preferred stocks and $5 billion in warrants to acquire ordinary shares within five years at $115 per share).
Few days before the Goldman deal, Warren Buffet struck a deal and paid $4.5 billion to acquire Constellation Energy, one of the largest suppliers of electricity and fossil fuels in North Eastern United States. On January 8, 2008, Constellation's market capitalization was $19.25 billion. Its share price on this date was $197.97, but had fallen to $13.00 on September 16, 2008.
Constellation Energy was founded in Baltimore, Maryland in 1906. On October 2, 2008, sensing unparalleled opportunity in the banking industry, Wells Fargo & Company bid $15 billion to acquire Wachovia Bank, offering to acquire the bank with its own stocks and cash without Federal Deposit Insurance Corporation, FDIC, assistance (the US Bank regulator and customers deposit insurer). Berkshire Hathaway, Inc., (Warren Buffet's investment vehicle) own nine percent of Wells Fargo and is the bank's largest institutional investor.
The long term investor has a lot to learn from the conduct of Wells Fargo & Company. It saw an opportunity in the acquisition of Wachovia Bank. Citigroup and Wachovia had already reached a deal few days earlier with the assistance and express support of the FDIC.
Wells Fargo took the calculated risk of being sued for interfering in contractual rights by Citigroup and made an offer to acquire Wachovia at a higher price rather than sit on the side lines and allow the acquisition by a rival bank. (Citigroup has since slammed Wells Fargo with a $60 billion lawsuit). Whoever acquires Wachovia will emerge as the largest commercial bank in the United States with more than $1.4 trillion in customer deposits.
On September 29, 2008 when Citigroup bid to acquire Wachovia Bank, the company's share had dropped to $0.75 with a market capitalization of $150 million. Wachovia's 52 week high was $52.25 per share reached on October 5, 2007 with market capitalization of $112 billion. October 2, 2008 saw Mr. Buffet inking another deal. He put up $3 billion to acquire GE preferred stocks that will return 10 percent with another $3 billion in warrants for ordinary shares of GE.
Taking a queue from investors and leading corporations who use market volatilities to solidify their hold in the market place and increase their market or industry positions, the individual investor should always strive to understand the working of the market. Unquestionably, Warren Buffet is betting that Goldman Sachs with the new authority to become a bank holding company will use its intellectual properties and abilities to understand global banking to acquire regional banks in the US and increase shareholder returns.
The Nigerian Market
Eze Nwagbaraji, a US based lawyer and investment banker, wrote recently that volatile markets are the individual investor's best openings to increase wealth.
The individual investor who is investing for retirement year responsibilities, he stated, should never be bogged down by seasonal shifts in market sentiments. "What happened in the United States in the last 10 days of September 2008 represented a rare opportunity for an individual investor to move in and increase his holding of some of the best corporations on earth," he noted.
This very much represents the situation in Nigeria at the moment. Leading Nigerian banks and corporations are trading at a fraction of their 52 week highs. A volatile market creates unpredictable environment for the casual market participant. "There are many casual market participants in the market. As several of them rushed to get out of the gate in the market, the seasoned individual investor who has done his home work sees an opportunity to enter the market with relative ease," he further said.
There is nothing wrong with UBA, Intercontinental Bank, Zenith Bank, Oceanic Bank, First Bank or any of the elite banks in Nigeria. Indeed, it had been said severally by the market authorities that the fundamentals of the market are still very strong. The banks are still reporting mouth-watering profits and paying handsome dividend, capped with generous bonus offers.
UBA, the biggest bank in the West African sub-region in terms of branch network and assets, last week Wednesday had its stock traded at N19.26 per share, down from its 52 weeks high of N63.94 per share, a drop of N44.68 per share.
Zenith Bank apart from reporting very impressive result this year, is promising a record dividend of N1.70 per share yet as at last Wednesday, the share price was just N27.71 each, down from 52 weeks high of N51.15 per share, a drop of N23.44 per share.
Afribank Plc also had an impressive performance in the 2007/2008 financial year. Gross earnings increased by N21.65 billion, from N27.54 billion in the year ending March 31, 2007, to N49.19 billion in the year under review, representing an increase of 79 per cent. On this basis, profit before tax in the review period stood at N15.12 billion, an increase of 107 per cent on the N7.29 billion recorded in the corresponding period of the previous year.
The bank posted an after tax profit of N10.03 billion during the year as against N5.20 billion recorded the previous year, an increase of 93 per cent. It was on the basis of this that the shareholders approved a dividend of N5.06 billion which translated to 50 kobo per share and a bonus issue of one for every three ordinary shares held was also approved by the shareholders.
The bank's total assets closed at N352.27 billion, representing an increase of 88 per cent over N187.08 billion posted in the corresponding period of the previous year. Total deposit rose by N82.34 billion, up 61 per cent from N135.64 billion in the year ended March 2007 to N217.98 billion in the review period. The improvement seen in the topline equally reflected in the overall positive performance of the bank.
Even with this, bank's stock as at last week sold for N17.14 per share from a peak of N31.60, down N14.46 per share.
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Every investment is risk taking. For now, those who invested in banks shares in Nigeria are facing hardtime occassioned by the current declining trend in Nigeria Stock Exchange Market. At moment, some of the banks' share price is less than the price of pure water in Nigeria, the situation means heavy loss for investors who want shortrun reward. Investors who want longrun reward will surely recoup in the longrun and make good profit from their investments. For those in shortrun,take hearth, while those in longrun should buy more to consolidate their share holdings in those banks.
I absolutely agree with the sentiments shared in this article on the timing to buying back in to the banking shares that slipped away from many investors reach during the banking consolidation frenzy.
The Nigerian banks with strong balance sheets and liquidity positions at their current prices are an absolute bargain if you an investor with a mid term to long term investment portfolio.
I see these very bargains screaming at me to get in on the action as I am NOT a short term speculator like a lot of inexperienced or even in some cases greedy nigerian investors only… [Read Full Text]