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This week on the Exchange, we review the banking sector of the T&T Stock Exchange (TTSE), the largest sector by value or market capitalization, accounting for more than half of the total market value of the TTSE. Despite financial market volatility and heightened global uncertainty, earnings in the banking sector have – overall – largely improved over the course of 2022. The positive earnings momentum in the larger TTSE sector signals t Brighter economic fortunes ahead, or could swirling economic headwinds dampen economic activity in the months ahead? We discuss below.
Rebound in bank profits
The banking sector accounts for approximately 53.5% of the total index value on the TTSE. For the nine-month period of the banks’ respective fiscal year 2022 (9M2022), earnings improved compared to the prior comparable period. Banks’ total earnings per share (EPS) – assuming an investor owns one share of each company/banking group – for 9M2022 was $12.92 compared to $11.49 in 9M2021, which represents a 12.5% year-over-year increase. Although not yet back to 9M2019 ($13.64) levels, banking sector earnings continued to recover from the recent 9M2020 low of $8.77 per share when the COVID-19 pandemic has virtually crippled entire economies.
Declining banking market capitalization
Despite a recovery in profits for each of the bank stocks, four of the five listed banks have recorded lower prices since the start of the year, with shares of NCBFG (down 40.0%) dragging the sector lower. SBTT is the only bank stock with a positive evolution of its price since the beginning of the year (↑13.6%).
Data from the Trinidad and Tobago Stock Exchange (TTSE) showed that the value (market capitalization) of publicly traded bank stocks appreciated 12.0% from $71.5 billion in 2018 to $80.1 billion by the end of 2021. Year-to-date, the sector’s market capitalization has contracted by 14.9% to $68.1 billion.
Better valuation of banking stocks?
The banking sector’s average price-to-earnings (P/E) ratio increased continuously between 9M2018 and 9M2021, from 14.1 times to 21.7 times. The P/E ratio is a simple but effective indicator of how much investors are willing to pay for every dollar of profit generated by a company. Higher P/E multiples suggest stocks are more expensive. High P/E multiples were evident in the 9 months of 2021, with the most expensive bank stocks trading at a P/E of 30.5x and the cheapest at a P/E multiple of 20.1x, with fairly rapid price increases outpacing earnings growth.
Some degree of mean reversion has occurred in 2022, with a combination of stock price correction and improved earnings leading to improved P/E multiples. Banking sector P/E multiples are now fairly comparable to pre-COVID levels, with the sector’s average P/E of 14.5x in 9M2022 compared to the pre-Covid19 level of 14.1x in 9M2018.
The range of P/E multiples between individual stocks has also widened, suggesting that investors may be more discerning in stock picking. For example, in 9M2022, FirstCaribbean International Bank Ltd (FCI) is currently trading at the most relatively attractive P/E ratio (7.5x), compared to Scotiabank T&T Ltd (SBTT) which is trading at the relatively more attractive P/E. the most expensive multiple (20.7x).
In terms of the market/book value (M/B) multiple – the market price per share relative to the book/book value of a company’s net assets per share, the industry average has remained relatively constant around 2.0 times between 9M2018 and 9M2022.
While average M/B ratios showed stability, the range of M/B ratios between individual stocks widened in 9M2022 after narrowing in 9M2020 and 9M2021. The broadening of the range suggests that there may be opportunities for investors to be more selective in choosing individual stocks within the banking sector if they are looking for relative value. For example, at 9M2022, FCI is currently trading at the more attractive M/B ratio (1.0x), compared to SBTT which is trading at the more expensive M/B multiple (3.2x).
Cost management improves
The efficiency ratio is a measure of how well banks manage their expenses in relation to revenue generation (lower ratio = better performance). Most banks were able to improve their efficiency ratios during 9M2022 compared to the previous comparable period. NCBFG improved its efficiency ratio 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 reduce their efficiency ratios in 9M2022. The FCGFH efficiency ratio increased from 54.8% to 59.0% in 9M2022. This general improvement in efficiency ratios could be an indicator of improved bank profitability in later periods.
Credit quality is recovering
Impairment losses as a percentage of total loans have declined from highs seen in 2020. Heightened uncertainty caused by the COVID-19 pandemic has pushed provisions up to an industry average of 1.7%. Despite mounting inflationary pressures across the region, impairments fell to 0.3% on average over 9M 2022 amid recovering economic activity. Reduced impairments may signal an improvement in the perceived quality of banks’ loan portfolios as the likelihood of delinquency, distress, and/or default decreases.
Considerations for Investors
The banking sector has, thanks to a combination of factors, returned to more attractive territory from an investment point of view. 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 diversified conglomerates with large banking and insurance operations. (like NCBFG).
For income-oriented 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 dollar dividends. Americans. Growth-oriented banking investors could look to RFHL and NCBFG, which have made several acquisitions over the past few years. FCGFH might also be on the minds of investors looking for banks with expansionary ambitions, given the Group’s recent (but ultimately unsuccessful) attempt to enter the Guyana market, as well as its relatively recent acquisition of a 19.9% stake in online lender Term Finance. (Holdings) Ltd.
From a macroeconomic perspective, the financial performance of banks in future periods will depend on the health of regional economies and related activity. For now, the impact of inflationary pressures and the rising cost of living on disposable income and demand for credit appears to have been more than offset by the momentum generated by the “post-COVID” economic reopening. While it remains to be seen whether this momentum will continue, recent results suggest that banks (and the underlying economies they serve) appear to be recovering reasonably well from a difficult two-year period.