Nigerian banks are rebounding from a record discount to lenders in South Africa as growth prospects for the continent’s two largest economies diverge.

Investec Asset Management says the rally has further to run, according to a Bloomberg report on Friday.

The Nigerian Stock Exchange Banking 10 Index has increased 19 per cent this year compared with a 3.4 per cent drop for South Africa’s six-company FTSE/JSE Africa Banks Index and a 8.2 per cent decline for the MSCI Emerging Markets Banks Index.

South African lenders trade at a premium of 2.4 times to their Nigerian peers on a price-to-book basis, down from a record 2.7 times in January.

The Central Bank of Nigeria, led by Governor Lamido Sanusi, fired the heads of eight banks four years ago, pumped N620bn ($3.9bn) into ailing lenders and created a state-owned company to buy bad debts to stabilise the industry.

Guaranty Trust Bank Plc to Ecobank Transnational Incorporated and Zenith Bank Plc are benefiting from financing oil, gas and power projects in Nigeria while bad debts fall as the International Monetary Fund predicts Africa’s second-largest economy will grow 7.2 per cent this year.

In South Africa, consumers are struggling to repay loans, curbing profit at companies including Standard Bank Group Limited as the jobless rate climbs and the IMF forecasts 2013 growth of two  per cent, the slowest since the 2009 recession.

“Nigerian banks do look favourable,” Mishnah Seth, a bank analyst at Investec, which manages the equivalent of $105bn, said by phone from Cape Town August 8. “From a valuation perspective they’re cheaper” than their South African peers. “They’ll give you superior growth” over the next two years, she said.

Nigerian lenders are extending a second year of gains after a debt crisis in 2008 and 2009, sparked by loans that soured after speculators wrongly bet against an increase in equities.

The benchmark banking index sank 34 per cent in 2009, rose 26 per cent the following year than dropped another 32 per cent in 2011 before advancing 24 per cent last year.

United Bank for Africa Plc is leading gains this year with a 78 per cent increase followed by Union Bank Nigeria Plc and Diamond Bank Plc Skye Bank Plc is the only lender in the index to retreat in 2013.

Nigeria’s publicly-traded banks are set for profit growth of about 20 per cent a year over the next two to three years, Investec’s Seth said.

That compares with estimated earnings growth this year of 9.8 per cent at Johannesburg-based Standard Bank, which owns Nigeria’s Stanbic IBTC, and 13 per cent growth for 2014, according to data compiled by Bloomberg.

Asset sales and expansion plans are buoying demand for Nigerian banks. The government of Africa’s top oil producer is selling stakes in power plants and transmission and electricity distribution companies spun out of the former state-owned utility.

Phone companies, including MTN Group Limited and Globacom Limited, plan to invest at least $5bn in Nigeria in anticipation that the market, already Africa’s biggest with 114 million subscriptions; will expand to 200 million by 2017, according to Informa Telecoms & Media estimates.

“There’s a lot for the banks to do,” Ronak Gadhia, an African equity analyst at Exotix Ltd., said by phone from London. “Telecommunication companies are pretty expansionary, oil and gas still needs quite a lot of investments.”

South African banks deserve to trade at a premium to lenders in Nigeria because of the West African nation’s regulatory environment, Peter Mushangwe, an analyst at Johannesburg-based Legae Securities, said in an e-mailed response to questions.

Source: Punch