Saturday, October 30, 2010

Banking Stocks: Important Sector when Allocating to Frontier Markets - The Derivation of a Theme Portfolio


The Global Crisis in 2008-09 has of course hit terribly hard in the financial industry. Banking stocks struggled enormously. Large US banks of high prestige like Citibank and Bank of America lost about half of their value over the last 3 years. Banks in Emerging and Frontier Markets were of course hit as well, although not so hard: over the last 3 years Frontier Market banks lost 13.9% versus 29.4% for the US top-4 Citibank, Bank of America, Wells Fargo and JP Morgan. And when we look at the most recent 12 months, the Frontier Market banks recovered +1.6%, whereas the 4 US Banks still lost 9.6%.

In this article - based on a contribution on US online news site The Street - we introduce to you 10 of the most important Frontier Market Banks. We will use this unverse for the derivation of a theme portfolio that can be an interesting niche component to your overall investment strategy. Banks will be an important growth sector in Frontier Markets. In most of these countries the financial infrastructure is not that well developed yet, but one of the first things we normally see in a growing economy is that growth required an increased spectrum of financial products in all sub-sectors of financial services from commercial retail banking to investment banking, insurance and investment management. Linkages with Western providers of money transfer and credit card services are also an important growth market.

 GDP Growth and Frontier Markets
Top countries Qatar and Nigeria part of the theme portfolio banking that LMG will create in this article; Vietnam to complete our set so as to incorporate a more general Asia play

In tabel 1 we provide you with an overview of the 10 most promising banks according to The Street.

The basic universe for the derivation of a Frontier Market Finance theme portfolio 2010-2011

The bank in the table do have market capitalizations of at least USD 1 billion, so although the markets that they operate in are still relatively small Frontier Markets - with the financial sector being known for international linkages - we chose larger sizes so as to avoid too high an illiquidity risk.

Qatar and Nigeria dominate

Banks from Qatar and Nigeria dominate. Within the Frontier Markets Qatar and Nigeria are the most important countries when it comes to the Financial Services industry. Nigeria plays a leadership role in this respect in Sub-Saharan Africa and Qatar plays an important role within the Middle East at the Arabic peninsula. An interesting aspect of the Qatar banks is that they do also offer Islamic Banking services. Islamic Finance has done relatively well during the recent crisis. The acceptable ratio of Equity to Debt in traditional banks can be lower than 10 percent. This is unacceptable in Islamic Banks who are far more risk averse when it comes to their funding. As a result of this their business operations were hit less hard by the Crisis than those of sector peers in the Western world.

The four Nigerian banks do have a combined share of 24% of the Nigerian stock exchange cap-weighted index and that is another way of showing how important banks already are in Nigeria. The combined weight in Qatar of the three chosen Qatari banks is 20%. In Romania and Vietnam the leading banks do already capture about 20% of the local cap-weighted index alone! This clearly proofs how important the sector already is for Frontier nations.

As always in Frontier Markets, the number of analysts following the companies is relatively small. This information shortage does of course translate into more risk on the one hand, but it does also imply that those investors doing their homework might reap nice excess information related profits.

The analysts surveyed by The Street do believe that the average price appreciation of the stocks in this group of 10 might be able to 24.8% during the next 12 months, an excellent return.

In the next paragraph we will tell you a bit more about these banks.

About our top-10

The NIgerians 
Access Bank is the favorite of the analysts surveyed by The Street. With a P/B of 0.8 it is one of the cheapest banks in our spectrum when it comes to valuation levels. The bank was founded in 1988 and is listed on the Nigerian stock exchange since 1998. It is the smallest of the four Nigerian banks in our sample. The bank is not just active in Nigeria but in a set of other - mainly - West African nations as well. Revenue over 2009 was USD 193 million and the bank has a total of 1430 employees. For more information see also the bank's Wikipedia page.

First Bank of Nigeria was already presented as an LMG Emerge favorite end of last year. The former largest financial institution in Nigeria (now passed by Zenith Bank) focuses on lending to retail clients far more than its competitors who focus mainly on large multinationals and local corporate lenders. Revenue over 2009 was USD 500 million. Compared to the others FBN is to a larger extent already active in the international arena outside Africa. Its roots go already back to 1894, to the Bank of West Africa. At one time Standard Bank of South Africa was also a big shareholder of it. But in the 1970s the South Africans lost the majority and withdrew as shareholder. The bank will further increase its penetration in Africa in 2011 through expansion into Angola, Kenya, Ghana and Congo. Further expansion of the outside-Africa network is also envisioned with new offices in New York and Dubai. 

Zenith Bank is since 2007 the larges bank in Nigeria, and not just that it is also the largest company in West Africa. The bank was founded in 1990 and was listed at the Nigerian stock exchange in 2004. The company has more than 3900 employees and total revenues over 2009 are at USD 665 million now also substantially larger than that of First Bank of Nigeria. For more information see the bank's Wikipedia page.

The fourth bank in our Nigerian selection is United Bank for Africa, UBA. Its roots go back to 1949, but as such it was incorporated as UBA in 1961. Total revenue levels are at USD 650 million, which is relatively high compared to its market value when looking at the main competitors First Bank and Zenith. The bank has 14000 employees and has a huge network domestically. In terms of number of clients it is bigger than the others, focusing to a larger extent on smaller retail clients. It is active in almost 20 African nations. In terms of valuation levels it looks somewhat more interesting at the moment than Zenith Bank. For more information see the bank's Wikipedia page.

Depending on the size of the investor's portfolio we advise to select 1 or 2 of these banks for your portfolio. Of the four Zenith is least favored by us, not because it is a bad bank but valuation levels are substantially higher than for the other three. 

Qatar: gateway to Frontier Islamic Finance 
There are three banks from Qatar, namely Doha Bank, Qatar Islamic Bank and Masraf al Rayan. In terms of valuation the differences are not so big. Masraf al Rayan is far less closely followed by analysts and for us that is a risk factor, although it could - for those of you who follow Qatar more closely - also be a source of information advantage. Compared to the Nigerian banks it is more complicated to get a sufficiently transparent set of information, although we should of course also be careful with assigning too high a value to the Nigerian information when comparing it with that of big banks in developed markets. Doha Bank is the largest private commercial bank in the State of Qatar, although it is in market value still the smallest of the three. Over the period 2006 - 2009 shareholder equity has more than doubled and the same holds for total assets. However, net profit increased by just 30 percent during that period. Qatar Islamic Bank is closely tied with the government as the Qatar Investment Authority is one of its main shareholders. QIA is the country's sovereign wealth fund that was established in 2005 so as to manage the excess oil and gas surpluses. It has about USD 60 billion in assets and strong international ties. LMG believes that Qatar Islamic Bank can use those networking ties to its advantage. For that reason we prefer QIB as our Qatar favorite. Islamic Banks have withered the storms of the Global Crisis quite nicely and we believe that there should definitely be one incorporated in your portfolio. QIB, from what is now the richest country in the world based on its GDP per capita, would be a good choice.

 Qatar Islamic Bank; our favorite from Qatar

The other nations: Romania, Vietnam and Oman
In the third bloc we have an Eastern European bank, BRD Groupe Societe Generale (linked to this French institution), a Vietnamese bank, Asia Commercial Bank, and a bank from Oman, Bank of Muscat. When you follow our advise to add QIB to your portfolio to cover the Gulf region, we would advise not to add Bank of Muscat and opt for either the Romanian or Vietnamese bank. In terms of valuation levels they are about equally strong. However, we believe that the direct ties with Societe Generale are in a way making the Eastern European play less special and not just that: with Eastern Europe struggling to a far greater extent than Vietnam, we opt for Asia Commercial Bank. Asian momentum in general is large and we are confident that the Vietnamese economy will benefit from recent wage increases in China. This will create new opportunities in Vietnam and the banking sector will benefit. However, be aware that in terms of valuation levels ACB is already a bit more expensive than the other banks in the portfolio. This is therefore more a growth than value stock.

Asia Commercial Bank is not just a pure banking play in Vietnam;
It is also part of a more general Asia play, speculating on Vietnamese growth because of high wage increases in China 

In case you want to play the 'banking theme' in Frontier Markets and do not want to opt for a global frontier fund approach and focus on the pure sector play instead, you can get nice solid coverage as follows:

  • Use Qatar Islamic Bank as a solid basis of your portfolio (40%)
  • Incorporate Asia Commercial Bank as a more expensive growth stock playing the Asia card (30%)
  • Add Access Bank from Nigeria because of its low valuation (15%)

  • And last but not least, United Bank for Africa because of its profitability and large client base with the potential for further growth when Africa improves its faith over the next 3-5 years. Its links to Microfinance opportunities are also of interest (15%). 

The percentage indicate the part of your total allocation to this Frontier Banking theme that should go to a specific bank.

Click here for the original article in The Street.


1 comment:

  1. Hi,Joint venture companies with Qatari partners are allowed in all sectors of the economy excluding commercial agencies and real estate. Foreign partners in partnerships must pay the full amount of their contribution in Business setup in Qatar of share capital to an authorized financial institution in cash prior to obtaining the Companies' Commercial Registration.Thanks....