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.
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.
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.
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.
Although all the banks have announced plans to raise capital, the dates and share prices for the capital raises have not yet been announced
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.
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.
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.
Despite potential headwinds for investors interested in banking stocks, these conditions still provide a unique opportunity for medium-term investments.
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.