Story highlights

• Nigerian banking stocks have suffered a sharp decline in the second quarter, exacerbated by the Central Bank’s recapitalization directive.
• The FUGAZ stocks, comprising major Nigerian banks like FBNH, UBA, GTCO, Access Corporation, and Zenith Bank, have entered a bearish phase, with share prices significantly declining in anticipation of rights issues.
• Financial analysts have noted that the share price decline typically accompanying rights issues is due to the offer of shares at prices below market rates to entice existing shareholders, thereby increasing the supply of shares and putting downward pressure on prices.

Nigerian banking stocks have experienced a dismal second quarter thus far. This downtrend follows the Central Bank’s announcement on banking recapitalization, which has set expectations for further declines in share prices.

Investors, particularly those with substantial interests in major Nigerian banks, tell Nairametrics they are bracing for these potential drops. Early trends suggest their expectations of lower share prices is panning out as they gear up for non-dilutive rights issues.

These rights issues are typically the first step in the capital-raising process and could lead to further downward pressure on stock prices they opine.

Banking All Share Index

This trend is currently reflected in the performance of banking stocks. The Banking All Share Index, which tracks some of the most capitalized bank stocks on the Nigerian Exchange, is down 18% quarter-to-date, in stark contrast to the All-Share Index, which has seen a 6% increase over the same period.

• Year-to-date, Nigerian banking stocks have decreased by 6.8%, while the NGX All Share Index has risen by 31.37%.
• This is a significant reversal from the first quarter of the year, during which banking stocks posted a 14.6% return.
• At that time, the narrative was that bank stocks were undervalued both in terms of their earnings multiple and when evaluated in dollars.
• The momentum, however, has slowed recently, largely due to newly announced banking recapitalization plans.
• Nigeria’s Central Bank has mandated an increase in the minimum share capital, requiring international banks to hold N500 billion and nationally licensed banks N250 billion. This directive indicates that the banking sector must raise over N4 trillion (about $2.8 billion) within 18 months.

As a result, investor relations teams at banks are reportedly working overtime to meet these deadlines. But with billions of shares outstanding and freely floating, bank stocks are likely to face downward pressure in the short term as investors anticipate the rights issues.

FUGAZ stocks under pressure

The performance of tier-one bank stocks, which include FBNH, UBA, GTCO, Access Corporation, and Zenith Bank (FUGAZ), points to a bearish streak even as most adjust their prices ahead of dividend announcements.

In a recent Nairametrics report, nearly all the banks dropped below the one trillion market capitalization mark, with GTCO and Zenith barely hanging on. The valuation of FUGAZ bank shares is significantly declining in response to announcements of impending right issues.

• For example, FBNH, whose share price was quoted as high as N43 per share, is now down to N25 per share.
• One investor, who requested anonymity, suggested the stock could fall further to its year low of around N18, achieved on April 24^th, if it continues to be oversold based on their technical analysis.
• A market maker with ties to the bank suggested the bank’s planned N300 billion rights issue could be priced at N15.50 per share, pointing to the same price that was mooted when the bank first announced a right issue in 2023.
• Access Corporation, Nigeria’s largest bank by total assets, has already seen its share price fall to N17.4, just N1.4 shy of its own year low of N16 per share. Access Bank also announced plans to raise N365 billion via a rights issue.
• UBA, another tier one bank, has seen its share price drop from a year high of N33.95 to just N20.50. The board also approved a rights issue for the bank. The last time UBA raised capital via a rights issue in 2015, it did so at a share price of N3.50.
• The same trend applies to Zenith Bank and GTCO, which have also seen their share prices fall from year highs of N47.35 and N53 to N34 and N40, respectively.
• They are also shy of their year lows of N31.3 and N32.7. Both GTCO and Zenith have also announced plans for the right issue.

Although all the banks have announced plans to raise capital, the dates and share prices for the capital raises have not yet been announced

What they are saying

Speaking on the issue, the president of the Association of Capital Market Academics of Nigeria (ACMAN) highlighted that a decline in share price often coincides with a rights issue.

President of ACMAN, Professor Uche Uwaleke, said the trend is commonly observed as rights issues are usually extended to existing shareholders at prices lower than prevailing market rates, aiming to incentivize shareholders to subscribe for additional shares.

Consequently, the influx of shares into the market intensifies, particularly when shareholders choose to divest a portion of their holdings, exerting downward pressure on share prices.

“A fall in share price normally accompanies a rights issue. This is because rights issues are typically made to existing shareholders at prices below current market values to serve as incentives to the shareholders to take up additional shares. So, the supply of shares to the market is increased especially when those shareholders opt to sell part of their shares which end up depressing share prices,” he said.

The Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Olatunde Amolegbe, noted that a discernible reaction has been evident since last month following the release of the recapitalization timeline by the Central Bank of Nigeria (CBN).

He emphasized that investors consistently exhibit caution regarding dilution stemming from capital-raising endeavours, particularly those entailing equity augmentation.

Amolegbe anticipates that volatility in banking stocks is likely to persist until the completion of the Rights issues.

“We’ve started seeing that reaction since last month when the recapitalization timeline was released by the CBN. Investors are always wary of dilution that typically results from capital raising exercises especially those involving equity raise.

My expectations are that volatility in banking stocks will probably continue until the rights issues are completed”.

The Managing Director of Highcap Securities Limited, Mr. David Adonri, highlighted that the post-rights Issue price dynamics are typically influenced by the prevailing market sentiment.

In a bullish market environment, prices may experience an upward trajectory following such issuances. However, he cautioned that irrespective of market sentiment, an oversupply of stocks resulting from a new issue could lead to a decline in prices.

Adonri noted that the movement of banking stocks after an impending rights issue is subject to considerable uncertainty, owing to the volatile nature of stock market fluctuations.

Outlook for banking stocks

Despite potential headwinds for investors interested in banking stocks, these conditions still provide a unique opportunity for medium-term investments.

• Banks are perhaps uniquely positioned to achieve the highest profits in their history, bolstered by central bank policies that have enhanced their earnings from foreign exchange gains and income from risk-free government securities.
• However, risks still exist in the longer term, with capital raises likely to increase the number of outstanding shares. The more shares a bank has, the greater the pressure on it to deliver strong earnings per outstanding share.
• Banks also face potential challenges as the era of super profits, driven by current central bank forex and monetary policies, gives way to a reliance on income from riskier lending activities.

Investors also have one eye on risk-free government securities which attract interest rates as high as 20% compared to the stocks which are riskier despite being cheap.