Few Nigerian Banks May Collapse In 2016

Mar 18, 2015

A new report by Allan Gray Group has stated that a few Nigeria banks may go bust or raise capital next year. The report, which examined the lenders’ performance as of the end of March, added that investors’ sentiment towards Nigerian banks had gone from positive to ‘outright fear.’ The research by Allan Gray, Africa’s largest privately-owned investment management company, linked the development to the falling oil price, likely spike in bad debts, political uncertainty and the Boko Haram insurgency. The report read in part, “Sentiment towards Nigerian banks has gone from positive to outright fear”, hence the forecast that few Nigerian banks may collapse in 2016.

The fear is not without reason given the falling oil price, likely spike in bad debts, political uncertainty and Boko Haram insurgency. “It is indeed likely that there will be a lot of distress in the next year, but it is important to remember that what a company earns in a particular year generally has little bearing on the intrinsic value of the business; what counts is the level of normal earning through the cycle and the ability to grow those earnings.

“Financial companies are a little different in this regard as they may go bankrupt before achieving normal earnings. A few Nigerian banks may go bust or raise capital, but luckily the share prices are discounting this probability.” The Allan Gray report, entitled ‘Gray Issue: The sentiment pendulum’, also compared Nigerian banks with Kenyan banks relative to their assets and the Gross Domestic Product of their respective countries.

According to the research and investment firm, there is no reason why the Kenya banking sector should be any more or less profitable than the Nigerian in the long term, arguing that over the past 10 years the Return on Equity for the two sectors have been similar. The ROE measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested.

The report read in part, “Sentiment towards Nigerian banks has gone from positive to outright fear. The fear is not without reason given the falling oil price, likely spike in bad debts, political uncertainty and Boko Haram insurgency.

“It is indeed likely that there will be a lot of distress in the next year, but it is important to remember that what a company earns in a particular year generally has little bearing on the intrinsic value of the business; what counts is the level of normal earning through the cycle and the ability to grow those earnings. “Financial companies are a little different in this regard as they may go bankrupt before achieving normal earnings. A few Nigerian banks may go bust or raise capital, but luckily the share prices are discounting this probability.” The Allan Gray report, entitled ‘Gray Issue: The sentiment pendulum’, also compared Nigerian banks with Kenyan banks relative to their assets and the Gross Domestic Product of their respective countries.

According to the research and investment firm, there is no reason why the Kenya banking sector should be any more or less profitable than the Nigerian in the long term, arguing that over the past 10 years the Return on Equity for the two sectors have been similar. The ROE measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested.

The Punch, May 4 Page 31.

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