Here is Afrinvest’s analysis of the current state of the Nigerian banking sector. You can download their initial analysis of the banking sector as at April 2009 and the more recent analysis. Here is their summary:

In light of recent events, Afrinvest Research believes that the immediate impact on Nigeria’s financial and capital markets will be severe and quite extensive. While this may exacerbate the current level of agitation in the sector, we believe that an appropriate, well–timed combination of policy responses by regulators, aimed at addressing many of the underlying structural and credit concerns, should forestall a systemic crisis in the long term.

There is but One Direction for the Equities Market… South!
However, this will come at great cost, given the need to restructure balance sheets, in line with significantly increased provisioning levels and substantial asset write downs. The adverse effect of these on earnings growth will ultimately lead to significant reductions in gross earnings, while potential losses may be incurred for another one to two years. We therefore expect to see a significant fall in the equities market over the next 2 to 4 weeks as the NSE All-Share Index seeks to test even newer lows than the 19,000 mark previously recorded in March, with banking stocks
bearing the brunt.

Using the Afrinvest Equities coverage as a proxy, the market is currently trading at 8.7x 2009 earnings. Specifically, our banking universe as a group is currently trading at 4.4x 2009 earnings, down from 5.4x earnings in March, 2009. We find this to be very much in line with market reaction to the dark clouds hanging over the sector given less than expected earnings announcements, on the back of significant increase in loan loss provisions. We estimate that P/E multiples will go even lower to about 3.0x earnings on the back of even lower earnings forecasts, and further write downs to assets and shareholders funds. Therefore, we expect the market to trade at 6.1x forward earnings, down 30.0% from current valuations by our estimates, seeing as the banking sector accounts for over 60.0% of the market capitalization.

In the same vein, we expect to see even lower Price-to-Book (P/BV) ratios as most sector players will be priced for distress. Currently, Nigerian banks are trading at 1.1x book values based on shareholders funds, as reported in the most recent audited financial statements. This we expect to fall to between 0.5x to 0.7x book values, once banks adjust their balance sheets to accommodate write-offs for bad loans as well as the expected mark down in share prices in the market.

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