Banking stocks turn off investors

Published: 11 August 2017

Banking stocks are still a huge turnoff for investors on the local equities market if valuation multiples are anything to go by.

A look at price-to-book ratios of Zimbabwe Stock Exchange (ZSE)-listed companies shows that banking stocks are still not as hot for investors and are trading at unbelievable discounts to their book values.

As at July, CBZ was trading at 24% of its book value. NMB and ZB Financial Holdings were trading at 0,28% and 0,32% of their book values.

A bull run in the quarter to June saw major re-rating of ZSE counters, which has not benefitted banking stocks on the bourse.
Essentially, this means the counters are trading at considerable discounts to their book values.

Only banking and property stocks —Pearl, Mash, ZPI and Dawn — have not benefitted from the rally and continue to trade at somewhat discounted valuations.

CBZ is among some of the highest ranking counters in terms of dividend yield at 4,67% as at July 31. With a price-to-earnings (P/E) of 2,21, CBZ had the lowest P/E ratio despite being one of the top three most generous in terms of dividend yield, seen by some investors as an attractive rate of return.

This means that investors are not factoring in the dividends in their valuation of the stock.

The P/E ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company's earnings.

A look at banks' valuation multiples show that investors are buying stocks with seemingly good fundamentals in other sectors.

This is despite relatively cleaner balance sheets, thanks to the creation of the Zimbabwe Asset Management Company, a special purpose vehicle of the central bank assuming banks' bad loans in the market.

In the half year to June 30, CBZ reported total comprehensive income of US$12 million from US$11,9 million in the prior year.

The group had total assets amounting to US$2,1 billion and total liabilities of US$1,865 billion, implying a book value of US$293 million.

As of Wednesday, the counter was valued at US$68,7 million. This means the company was trading at 23% of its book value.

NMB, a bank with solid management and stable earnings, has also not benefitted from the re-rating on the ZSE.

NMB was trading at 28% to its book value, while ZBFH was trading at 32% to its book value.

A look at banks' P/E ratios shows investors do not find the stocks attractive.

Instead, investors are paying a premium for stocks in companies such as BAT and Delta. BAT had a P/E multiple of 40 and Delta at 22 as at July 31.

PPC had a P/E of 106,50, the highest on the ZSE.

"The reason banks are discounted is investors don't trust the assets banks are holding on to such as Treasury Bills and government paper and the loans. The long and short is that such assets are risky. This is the reason why other stocks are rallying," an analyst said.

"Another reason, say for CBZ, would be that although it's very big and makes decent profits, they don't pay huge dividends. So, general concerns of asset quality mean the stocks are not very attractive."

Analysts say some of the local banks are well run and should reflect this in their values.

"These local banks are well-run management-wise. Look at NMB and FBCH, they are well-run institutions. While P/E multiples have re-rated, banks are lagging behind," the analyst said.

But no fund manager has taken the risk on the counters as yet.
- Zim Ind

Tags: Banking,