Allan Gray Group, Africa’s largest privately-owned investment management company, has revealed in a report that a few Nigeria banks may go bust or raise capital next year.

The Allan Gray report, which examined the lenders’ performance as of the end of March, added that investors’ sentiment towards Nigerian banks had gone from positive to ‘outright fear.’

The research company linked the development to the falling oil price, likely spike in bad debts, political uncertainty and the Boko Haram insurgency.

The report read in part, “Sentiment towards Nigerian banks has gone from positive to outright fear. The fear is not without reason given the falling oil price, likely spike in bad debts, political uncertainty and Boko Haram insurgency.

“It is indeed likely that there will be a lot of distress in next year, but it is important to remember that what a company earns in a particular year generally has little bearing on the intrinsic value of the business; what counts is the level of normal earning through the cycle and the ability to grow those earnings.

“Financial companies are a little different in this regard as they may go bankrupt before achieving normal earnings. A few Nigerian banks may go bust or raise capital, but luckily the share prices are discounting this probability.”

The Allan Gray report, titled ‘Gray Issue: The sentiment pendulum’, also compared Nigerian banks with Kenyan banks relative to their assets and the Gross Domestic Product of their respective countries.

According to the research and investment firm, there is no reason why the Kenya banking sector should be any more or less profitable than the Nigerian in the long term, arguing that over the past 10 years the Return on Equity (ROE) or the two sectors have been similar.

The ROE measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested.

The study read, “With a similar ROE, the Price-to-Book value for these two countries’ banks should be fairly close. However, the largest five listed banks in Kenya are trading at 2.6 times book value, discounting a long-term ROE of about 26 per cent, while the Nigerian banks trade below book value, indicating a long-term ROE of around 10 per cent.

“The market capitalization of the companies relative to the assets on the balance sheet tells a similar story, with Kenya banks pricing in a return on assets 3.5 times that of Nigerian banks.

“In the Allan Gray Africa ex-SA Equity Fund we have a significant investment in Nigerian banks and very little in Kenya banks. We think the terrible sentiment and clear risks are giving us the opportunity to buy decent businesses, with favourable long-term prospects, at very attractive prices.”

The Price-to-book value is a financial ratio used to compare a company’s current market share price to its book value that is the value of the company’s net assets expressed on the balance sheet.

Industry players and analysts had said a number of regulatory measures aimed at stabilising the economy would make it difficult for banks to make higher profit this year.

Managing Director, Afrinvest West Africa Limited, an investment advisory firm, Mr. Ike Chioke, had said the reduction in banks’ fee income would make the year turbulent for the financial institutions.

He said, “It is going to be very challenging for the banking sector this year. You remember a gradual progression of the CBN trying to reduce the fee element that the banks do enjoy.

“The CBN has also come up with a lot of measures to control the foreign exchange. All of these are taking away the fee incomes that the banks would ordinarily have enjoyed. So, I see that some banks will be in a place where their cost structure may be too difficult for the income generated to carry. So, they will have to find new ways to generate additional income.

“But trying to find new ways to generate additional income in an environment where there is declining revenue overall for the federal, state and local governments is going to be very difficult. It is going to be a depressed year for the banks.”

The Managing Director, Asset Management Corporation of Nigeria, Mr. Mustafa Chike-Obi, recently said falling oil prices would cause “serious economic headwind” this year and banks would be forced to record very significant increase in non-performing loans.

Chike-Obi said: “We can see that there is an economic headwind coming to Nigeria this year; and when the economic headwind comes, it will certainly impact on the Non-Performing Loans levels. So, we expect an increase in the NPL levels this year.”

Fitch Ratings had in a report released on October 8, 2014 said that although the banks’ NPLs were below five per cent as of last year, it would not be