Last week we crunched the numbers of some Nigerian banks, analyzing their profitability, growth, risk, and value to separate the gems from the junk.
I hope you got as much of a kick out of the exercise as I did, because we’re going to do the same thing again today. Only this time, we’ll be covering eight of the largest banks from Nigeria’s neighbor to the west — Ghana.
Remember that this quick and dirty survey of the industry is only the first stage of analysis. It’s intended to separate the contenders from the pretenders – not to provide me with a buy decision.
With that said, let’s put eight of the Ghana Stock Exchange’s biggest banks through their paces.
If you’re in the market for a bank stock, chances are you’d prefer one that actually makes money.
Return on Assets (ROA) measures how effectively management deploys the assets under its control. I’ve calculated ROA as after-tax profits from continuing operations divided by average assets. Then, because bank earnings can be inconsistent, I averaged the ROA from the most recent five fiscal years.
To calculate a score, I divided the range between the most profitable bank and the least profitable one into deciles. The banks with ROAs in the highest decile were awarded 10 points. Those in the lowest decile scored just one point.
Here’s how they stacked up:
|Bank||Return on Assets (5-Year Average)||Score|
|Standard Chartered Bank Ghana (SCB.GN)||2.84%||10|
|Ecobank Ghana (EBG.GN)||2.70%||10|
|UT Bank (UTB.GN)||2.19%||7|
|Ghana Commercial Bank (GCB.GN)||1.57%||4|
|CAL Bank (CAL.GN)||1.57%||4|
|HFC Bank Ghana (HFC.GN)||1.42%||4|
|Ecobank Transnational (ETI.GN)||0.81%||1|
Profitability is great, but Africa’s best banks are constantly growing their assets. They’re tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.
To measure which banks are growing the fastest, I simply annualized the growth of each bank’s total assets over the most recent five fiscal years.
Here’s what I found:
|Bank||Asset Growth (5-Year Annualized)||Score|
|UT Bank (UTB.GN)||75.04%||10|
|CAL Bank (CAL.GN)||38.82%||5|
|Ecobank Transnational (ETI.GN)||37.41%||5|
|Ecobank Ghana (EBG.GN)||33.63%||4|
|HFC Bank Ghana (HFC.GN)||32.12%||4|
|Ghana Commercial Bank (GCB.GN)||24.03%||2|
|Standard Chartered Bank Ghana (SCB.GN)||22.62%||2|
3. Asset Quality
A bank’s challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather uncreditworthy customers. When these customers default, the loans must be written down to zero – a bad thing for profitability AND growth.
One of my favorite ways to measure a bank’s asset quality is to determine how much of the loan portfolio isn’t performing as planned. I do this by dividing non-performing loans by total loans. A lower ratio implies a lower degree of risk in the bank’s loan book.
Look here to see which banks are Ghana’s most conservative lenders:
|Bank||Non-Performing Loan Ratio||Score|
|Ecobank Ghana (EBG.GN)||0.66%||10|
|HFC Bank Ghana (HFC.GN)||4.15%||8|
|Ecobank Transnational (ETI.GN)||5.47%||7|
|CAL Bank (CAL.GN)||9.70%||4|
|Standard Chartered Bank Ghana (SCB.GN)||10.00%||4|
|UT Bank (UTB.GN)||13.90%||1|
|Ghana Commercial Bank (GCB.GN)||15.00%||1|
Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Ghana can end up losing you money if the price you pay for it is too dear.
When evaluating bank stocks, I take a close look at price/book ratios. Book value is simply the difference between a bank’s assets and its liabilities. Stocks with low price/book ratios generally have less downside risk. The lower a price/book ratio gets, the less risk there is of the bank disappointing the market and the greater potential there is for it to outperform expectations.
I prefer the price/book ratio over the price/earnings ratio for bank stocks. Why? Because bank earnings can be erratic. Thus, the P/E ratio for a bank coming off a particularly good or bad year will be skewed. Assets, on the other hand, are much less volatile and relatively easy for an accountant to value.
|Ecobank Transnational (ETI.GN)||0.66||10|
|CAL Bank (CAL.GN)||0.67||10|
|HFC Bank Ghana (HFC.GN)||1.07||9|
|UT Bank (UTB.GN)||1.76||7|
|Ghana Commercial Bank (GCB.GN)||2.01||7|
|Ecobank Ghana (EBG.GN)||2.66||5|
|Standard Chartered Bank Ghana (SCB.GN)||4.25||1|
5. Dividend Yield
Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stock’s share price. Therefore, most banks won’t raise dividends beyond a level they believe they can sustain.
|CAL Bank (CAL.GN)||10.83%||10|
|Ecobank Ghana (EBG.GN)||7.89%||8|
|Standard Chartered Bank Ghana (SCB.GN)||5.95%||6|
|Ecobank Transnational (ETI.GN)||5.71%||6|
|HFC Bank Ghana (HFC.GN)||4.89%||5|
|Ghana Commercial Bank (GCB.GN)||3.68%||4|
|UT Bank (UTB.GN)||0.00%||1|
Winner, Winner, Chicken Dinner!
Now let’s put all the scores together and count them down from worst to first.
8. Ghana Commercial Bank – There’s not an easy way to spin this. Venerable GCB got smacked around by its younger smaller cohorts. It performed relatively well in Price/Book ratio, but considering that 15% of its loan book is shaky, I wouldn’t bother paying 2x book value for it.
7. Standard Chartered Ghana – Easily the most profitable bank in Ghana, SCB commands a very high price tag. It’s Price/Book ratio is well above 4! But a relatively juicy dividend may lure some cautious investors.
6. UT Bank – The industry’s fastest grower is well worth watching, especially if it cleans up its assets and initiates a dividend. Until then, it remains one of the riskier banks in the group.
5. Ecobank Transnational – This fast-grower with continent-wide reach is trading at a very attractive valuation. It’s only weakness in the showdown was its low ROA, which is likely a by-product of its rapid expansion.
4. HFC Bank – A nearly pristine loan book combined with a reasonable P/B ratio gave this obscure bank a solid showdown performance. But its relatively low ROA and growth rate kept it out of serious contention.
3. CAL Bank – A sky-high dividend yield and a P/B ratio that suggests that its accountant believes it’s worth 50% more than the stock market does put this small bank in the upper echelon. Its small size kept it out of second place.
2. SG-SSB – This bank is profitable, cheap, and pays a very attractive dividend. But the subsidiary of Societe Generale doesn’t seem to have an eye for growth.
1. Ecobank Ghana – The local subsidiary of ETI, Ecobank Ghana’s strengths are its profitability and squeaky clean loan book. It doesn’t have much potential for geographic expansion, but it’s not huge and has room to spread its wings in Ghana’s rapidly expanding economy. Factor in a reasonable P/B ratio and a dividend yield of nearly 8%, and I think this bank merits a very long look.
|Bank||ROA Score||Growth Score||NPL Score||P/B Score||Yield Score||Total Score|
|Ecobank Ghana (EBG.GN)||10||4||10||5||8||37|
|CAL Bank (CAL.GN)||4||5||4||10||10||33|
|HFC Bank Ghana (HFC.GN)||4||4||8||9||5||30|
|Ecobank Transnational (ETI.GN)||1||5||7||10||6||29|
|UT Bank (UTB.GN)||7||10||1||7||1||26|
|Standard Chartered Bank Ghana (SCB.GN)||10||2||4||1||6||23|
|Ghana Commercial Bank (GCB.GN)||4||2||1||7||4||18|
What Do You Think?
Does Ecobank Ghana deserve to be head and shoulders above the rest of the field? Which bank stock do you think is the best bargain? Let me know your thoughts in the comments!
[Disclosure: As of publication date, I am long CAL Bank and Ghana Commercial Bank.]