Banking sector signalling recovery? – Trinidad Guardian

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This week, we at Bourse re­view the bank­ing sec­tor of the T&T Stock Ex­change (TTSE), the largest sec­tor by val­ue or mar­ket cap­i­tal­i­sa­tion ac­count­ing for over half of the TTSE’s to­tal mar­ket val­ue. De­spite volatile fi­nan­cial mar­kets and height­ened un­cer­tain­ty at the glob­al lev­el, bank­ing sec­tor earn­ings have – on ag­gre­gate – large­ly im­proved over the course of 2022. Does pos­i­tive earn­ings mo­men­tum in the TTSE’s largest sec­tor sig­nal brighter eco­nom­ic for­tunes ahead, or could swirling eco­nom­ic head­winds damp­en eco­nom­ic ac­tiv­i­ty in the months ahead? We dis­cuss be­low.

Bank Earn­ings Bounce

The Bank­ing Sec­tor ac­counts for rough­ly 53.5% of to­tal in­dex val­ue on the TTSE. For the nine-month pe­ri­od of banks’ re­spec­tive fis­cal 2022 (9M2022), earn­ings im­proved over the pri­or com­pa­ra­ble pe­ri­od. Banks’ to­tal earn­ings per share (EPS) – as­sum­ing an in­vestor held one share of each bank­ing com­pa­ny/group – for 9M2022 amount­ed to $12.92 rel­a­tive to $11.49 in 9M2021, rep­re­sent­ing a 12.5% in­crease year-on-year. While not yet back to the lev­els of 9M2019 ($13.64), Bank­ing Sec­tor earn­ings have con­tin­ued to re­cov­er from the re­cent 9M2020 low of $8.77 per share when the COVID-19 pan­dem­ic brought en­tire economies to a near-halt.

Bank­ing Mar­ket Cap Low­er

De­spite a re­cov­ery in earn­ings for each of the bank­ing stocks, four of the five list­ed banks record­ed low­er prices year-to-date with shares of NCBFG (down 40.0%) drag­ging the sec­tor low­er. SBTT was the on­ly bank­ing stock with a pos­i­tive year-to-date change in its stock price (↑13.6%).

Da­ta from the Trinidad and To­ba­go Stock Ex­change (TTSE) showed that the val­ue (mar­ket cap­i­tal­i­sa­tion) of pub­licly-list­ed Bank­ing stocks ap­pre­ci­at­ed 12.0% from $71.5B in 2018 to $80.1B at the end of 2021. On a year-to-date ba­sis, the sec­tor’s mar­ket cap­i­tal­i­sa­tion has con­tract­ed 14.9% to $68.1B.

Bet­ter val­ue in bank­ing stocks?

The bank­ing sec­tor’s av­er­age price to earn­ings (P/E) mul­ti­ple/ra­tio con­tin­u­ous­ly ex­pand­ed dur­ing 9M2018 to 9M2021 from 14.1 times to 21.7 times. The P/E ra­tio is a sim­ple but ef­fec­tive gauge of how much in­vestors are will­ing to pay for every dol­lar of earn­ings gen­er­at­ed by a com­pa­ny. High­er P/E mul­ti­ples sug­gest stocks are more ex­pen­sive. El­e­vat­ed P/E mul­ti­ples were ev­i­dent in 9M2021, with the most ex­pen­sive bank­ing stock trad­ing at a P/E of 30.5 times and the cheap­est at a P/E mul­ti­ple of 20.1 times, with fair­ly rapid price ad­vances out­pac­ing earn­ings growth.

Some de­gree of mean re­ver­sion has tak­en place dur­ing 2022, with a com­bi­na­tion of stock price cor­rec­tion and earn­ings im­prove­ment re­sult­ing in im­prov­ing P/E mul­ti­ples. Bank­ing sec­tor P/E mul­ti­ples are now fair­ly com­pa­ra­ble with pre-COVID lev­els, with the P/E sec­tor av­er­age of 14.5 times in 9M2022 rel­a­tive to the pre-Covid19 lev­el of 14.1 times in 9M 2018.

The range of P/E mul­ti­ples across in­di­vid­ual stocks has al­so widened, sug­gest­ing in­vestors could be more dis­cern­ing in stock se­lec­tion. For ex­am­ple, as at 9M2022, First­Caribbean In­ter­na­tion­al Bank Ltd (FCI) cur­rent­ly trades at the most rel­a­tive­ly at­trac­tive P/E ra­tio (7.5x), as com­pared to the Sco­tia­bank T&T Ltd (SBTT) which trades at the rel­a­tive­ly most ex­pen­sive P/E mul­ti­ple (20.7x).

In terms of the mar­ket to book (M/B) mul­ti­ple – the mar­ket price per share rel­a­tive to the book/car­ry­ing val­ue of a com­pa­ny’s net as­sets per share, the sec­tor av­er­age has re­mained rel­a­tive­ly con­sis­tent around 2.0 times dur­ing 9M2018 to 9M2022.

While av­er­age M/B ra­tios have dis­played sta­bil­i­ty, the range of M/B ra­tios across in­di­vid­ual stocks widened as at 9M2022 af­ter nar­row­ing in 9M2020 and 9M2021. The widen­ing range sug­gests there may be op­por­tu­ni­ties for in­vestors to be more se­lec­tive in choos­ing in­di­vid­ual stocks with­in the bank­ing sec­tor if search­ing for rel­a­tive val­ue. For ex­am­ple, as at 9M2022, FCI cur­rent­ly trades at the most rel­a­tive­ly at­trac­tive M/B ra­tio (1.0x), as com­pared to the SBTT which trades at the rel­a­tive­ly most ex­pen­sive M/B mul­ti­ple (3.2x).

Cost Man­age­ment Im­proves

The ef­fi­cien­cy ra­tio is a mea­sure of how well banks man­age their ex­pens­es, rel­a­tive to rev­enue gen­er­a­tion (low­er ra­tio = bet­ter per­for­mance). Most banks were able to im­prove their ef­fi­cien­cy ra­tios in 9M2022 over the pri­or com­pa­ra­ble pe­ri­od. NCBFG im­proved its ef­fi­cien­cy ra­tio, im­prov­ing from 77.9% in 9M2021 to 73.1% in 9M2022. FCI low­ered its ra­tio to 67.6% in 9M2022 from 72.1% in 9M2021. Oth­er banks, in­clud­ing RFHL and SBTT, al­so man­aged to low­er their ef­fi­cien­cy ra­tios in 9M2022. FCGFH’s ef­fi­cien­cy ra­tio in­creased from 54.8% to 59.0% in 9M2022. This gen­er­al im­prove­ment in ef­fi­cien­cy ra­tios could be an in­di­ca­tor of im­proved bank­ing prof­itabil­i­ty in sub­se­quent pe­ri­ods.

Cred­it Qual­i­ty Re­cov­ers

Im­pair­ment loss­es as a per­cent­age of to­tal loans de­clined from highs seen in 2020. Height­ened un­cer­tain­ty caused by the COVID-19 pan­dem­ic drove pro­vi­sions up to a sec­tor av­er­age of 1.7%. De­spite grow­ing in­fla­tion­ary pres­sures through­out the re­gion, im­pair­ment loss­es fell to an av­er­age of 0.3% in 9M 2022 against a back­drop of re­cov­er­ing eco­nom­ic ac­tiv­i­ty. The re­duc­tion of im­pair­ment loss­es may sig­nal an im­prove­ment in per­ceived qual­i­ty of banks’ loan port­fo­lios as the prob­a­bil­i­ty of delin­quen­cy, dis­tress and/or de­fault abates.

In­vestor Con­sid­er­a­tions

The bank­ing sec­tor has, through a com­bi­na­tion of fac­tors, re­turned to more at­trac­tive ter­ri­to­ry from an in­vest­ment per­spec­tive. In­vestors con­sid­er­ing Bank­ing stocks on the TTSE have a fair­ly wide menu, rang­ing from T&T-fo­cused fran­chis­es spe­cial­iz­ing in more tra­di­tion­al bank­ing ser­vices such as SBTT, to re­gion­al­ly di­verse con­glom­er­ates with sig­nif­i­cant bank­ing and in­sur­ance op­er­a­tions (like NCBFG).

For in­come-fo­cused in­vestors, stocks such as SBTT and FCI cur­rent­ly of­fer more at­trac­tive div­i­dend yields of 4.1% and 5.4% re­spec­tive­ly, while FCI al­so of­fers the added ben­e­fit of re­ceiv­ing div­i­dends in US dol­lars. Growth-fo­cused bank­ing sec­tor in­vestors might look at RFHL and NCBFG, who have ex­e­cut­ed mul­ti­ple ac­qui­si­tions over the past sev­er­al years. FCGFH may al­so be on the minds of in­vestors seek­ing banks with ex­pan­sion­ary am­bi­tions, giv­en the Group’s re­cent (but ul­ti­mate­ly un­suc­cess­ful) at­tempt to en­ter the Guyana mar­ket, as well as its rel­a­tive­ly re­cent pur­chase of a 19.9% stake in web-based lender Term Fi­nance (Hold­ings) Ltd.

From a macro­eco­nom­ic per­spec­tive, banks’ fi­nan­cial per­for­mance in sub­se­quent pe­ri­ods will de­pend on the health of re­gion­al economies and as­so­ci­at­ed ac­tiv­i­ty. For now, the im­pact of in­fla­tion­ary pres­sures and the ris­ing cost of liv­ing on dis­pos­able in­come and cred­it de­mand ap­pear to have been more than off­set by the mo­men­tum gen­er­at­ed from ‘post-COVID’ eco­nom­ic re­open­ing. While it re­mains to be seen if this mo­men­tum car­ries for­ward, re­cent re­sults sug­gest that banks (and the un­der­ly­ing economies they serve) ap­pear to be re­cov­er­ing rea­son­ably well af­ter a chal­leng­ing two-year pe­ri­od.