Investors fear Nigerian bank bubble

LAGOS – Investors in Nigeria’s burgeoning stock market are seeing danger signals that the recent rally is turning into a bubble.

Concerns focus on banks, where share price growth has been spectacular since a wave of consolidation in 2005. Most bank stocks have more than doubled in value this year alone – some have risen by more than 500 per cent – and the majority now trade at more than 20 times their expected 2008 earnings.Investors say these multiples are unsustainable, even for a fast-growing “pioneer” market like Nigeria, where investor confidence has been growing steadily since economic reforms began in 2003.”All the indicators of a market going out of control are here,” said Jonathan Chew, head of Imara Asset Management UK Ltd, which has US$25 million in Nigerian securities.”When the entire retail sector is talking about stocks and shares, you know it is getting toppy,” he added.Reforms introduced by former President Olusegun Obasanjo won the country debt relief and a BB- credit rating in 2005.Optimism was fuelled by a peaceful transition from one civilian leader to another in elections in April – a first for Nigeria – despite widespread vote rigging.President Umaru Yar’Adua has promised to extend Obasanjo’s reforms and the All-Shares Index is up 68 per cent in the 12 months to Aug 15, while the naira currency has strengthened against the US dollar.Fears of a bubble in the banking sector have mounted on reports that some banks are engaged in highly leveraged share purchase schemes through stockbrokers.One senior bank executive said he knew of one case where a capital market operator borrowed six billion naira from a bank to invest in that bank’s shares.’UNBRIDLED RISKS’ Bismarck Rewane, a consultant with Financial Derivatives Co.in Lagos, said the practice was widespread.”Margin trading is the biggest gamble in town right now.It’s very dangerous,” he said.Godwin Obaseki, managing director of brokers Afrinvest, said banks have extended big loans to brokers, perhaps as much as 20 per cent of the whole country’s credit.But he said he did not know of cases where banks insisted on the loans being used to buy their own shares, which would be illegal.”I don’t believe it is a deliberate attempt by banks to prop up their shares, but there are large numbers of uninformed investors taking unbridled risks.””There will be a correction, but I don’t think it will be as drastic as some people predict,” he said, adding that demand for Nigerian stocks was still very strong.Rewane estimated that 20 per cent of all stock purchases in Nigeria were made using borrowed money.Imara’s Chew said the large number of non-professional investors in the Nigerian market increased the risk that any fall would be a sharp one.In developed markets, institutional investors take advantage of corrections to buy.But in markets dominated by retail investors, a correction can easily turn into a crash because people are more prone to panic and sell at any price.”Nigerians have learned what to do in a bull market, but they have yet to learn what to do in a bear market.They might find out shortly,” said Chew.Nampa-ReutersMost bank stocks have more than doubled in value this year alone – some have risen by more than 500 per cent – and the majority now trade at more than 20 times their expected 2008 earnings.Investors say these multiples are unsustainable, even for a fast-growing “pioneer” market like Nigeria, where investor confidence has been growing steadily since economic reforms began in 2003.”All the indicators of a market going out of control are here,” said Jonathan Chew, head of Imara Asset Management UK Ltd, which has US$25 million in Nigerian securities.”When the entire retail sector is talking about stocks and shares, you know it is getting toppy,” he added.Reforms introduced by former President Olusegun Obasanjo won the country debt relief and a BB- credit rating in 2005.Optimism was fuelled by a peaceful transition from one civilian leader to another in elections in April – a first for Nigeria – despite widespread vote rigging.President Umaru Yar’Adua has promised to extend Obasanjo’s reforms and the All-Shares Index is up 68 per cent in the 12 months to Aug 15, while the naira currency has strengthened against the US dollar.Fears of a bubble in the banking sector have mounted on reports that some banks are engaged in highly leveraged share purchase schemes through stockbrokers.One senior bank executive said he knew of one case where a capital market operator borrowed six billion naira from a bank to invest in that bank’s shares.’UNBRIDLED RISKS’ Bismarck Rewane, a consultant with Financial Derivatives Co.in Lagos, said the practice was widespread.”Margin trading is the biggest gamble in town right now.It’s very dangerous,” he said.Godwin Obaseki, managing director of brokers Afrinvest, said banks have extended big loans to brokers, perhaps as much as 20 per cent of the whole country’s credit.But he said he did not know of cases where banks insisted on the loans being used to buy their own shares, which would be illegal.”I don’t believe it is a deliberate attempt by banks to prop up their shares, but there are large numbers of uninformed investors taking unbridled risks.””There will be a correction, but I don’t think it will be as drastic as some people predict,” he said, adding that demand for Nigerian stocks was still very strong.Rewane estimated that 20 per cent of all stock purchases in Nigeria were made using borrowed money.Imara’s Chew said the large number of non-professional investors in the Nigerian market increased the risk that any fall would be a sharp one.In developed markets, institutional investors take advantage of corrections to buy.But in markets dominated by retail investors, a correction can easily turn into a crash because people are more prone to panic and sell at any price.”Nigerians have learned what to do in a bull market, but they have yet to learn what to do in a bear market.They might find out shortly,” said Chew.Nampa-Reuters