Jaiz Bank Plc, Nigeria’s pioneering Non-Interest Bank operating under Islamic banking principles, has seen substantial growth in its share price since its listing on February 9, 2017.
Starting from its listing price of N1.25, the share price has risen by about 80%, reaching N2.25 as of the close of trading on July 17, 2024.
In 2023, Jaiz Bank had an impressive performance, with its share price increasing by 111% and closing the year at N1.94.
While 2024 hasn’t matched the fervour of the previous year, the stock has still shown resilience with a year-to-date gain of 15.98%, positioning it as one of the top performers among banking stocks this year.
However, the question remains: Have the bank’s fundamentals supported its share price performance? Should investors consider buying, holding, or selling based solely on its low-priced status as a penny stock?
Fundamentals
The bank reported a pre-tax profit of N11.35 billion in 2023 compared to N6.663 billion in 2022.
In Q1 2024, pre-tax profit surged by 227.63% year-over-year to N6.00 billion, exceeding half of the 2023 figure and surpassing its Q1 2024 forecast by about 26%.
With a conservative Q2 pre-tax profit forecast of N1.984 billion, it is likely to exceed its Q2 forecast as well.
The combination of strong financial results and exceeding forecasts may position Jaiz Bank as an appealing investment opportunity.
However, it’s equally crucial to assess the bank’s risk profile, financial health, valuation, and returns to shareholders.
Revenue and Profitability Analysis
Jaiz Bank has demonstrated robust growth in gross earnings, primarily fueled by profits from Murabaha transactions.
As a non-interest bank, Jaiz Bank engages in Murabaha, a type of Islamic financing where the bank purchases an asset at the request of the customer and sells it back at a marked-up price.
The profit earned from Murabaha transactions mirrors interest in conventional banking but adheres to Shariah principles, which prohibit interest charges.
In 2023, Murabaha transactions accounted for 67.61% of Jaiz Bank’s profit from financing activities and about 41% of its gross earnings.
This highlights the significant role Murabaha transactions play in Jaiz Bank’s profitability within its Islamic banking framework.
While Jaiz Bank has diversified its income streams in financing activities through various Islamic finance contracts such as Murabaha and Ijara (akin to leasing), the same cannot be said for its investment activities.
In 2023, profits from Sukuk, akin to bonds in conventional finance, constituted about 78% of Jaiz Bank’s investment income.
This poses a concentration risk and may expose the bank to potential vulnerabilities related to market volatility, issuer credit risk, and regulatory changes affecting Sukuk markets.
Financial Health and Risk
Jaiz Bank has demonstrated consistent profitability and growth, with pre-tax profit increasing from N2.11 billion in 2019 to N11.054 billion in 2023.
The bank’s total assets have grown significantly, from just N6 billion in 2012 to N670.98 billion as of Q1 2024.
The current paid-up capital of Jaiz Bank stands at N18.6 billion, just N1.4 billion short of the N20 billion required by the CBN for non-interest banks aiming for national status by March 31, 2026.
To address this, Jaiz Bank has announced plans to bolster its capital base to N70 billion by the end of 2024.
This announcement was made by the Chairman of the Board of Directors, Mustapha Bintube, during a farewell event in Abuja for 11 retiring board members, including the bank’s inaugural chairman, Alhaji Umar Abdul Mutallab.
The bank’s capital adequacy ratio (CAR) declined to 17.96% in 2023 from 18.81% in 2022. This indicates a reduction in the bank’s buffer to absorb potential losses, suggesting that the bank’s risk-weighted assets have grown faster than its capital base, raising concerns about its ability to withstand financial stress.
Increasing the capital base could help improve the CAR, enhancing the bank’s financial stability and capacity to manage risks.
Valuation Analysis
Jaiz Bank has impressive earnings per share (EPS) growth. EPS surged by 267.03% from Q1 2023 to Q1 2024, reaching 16.92 kobo and bringing the trailing twelve-month EPS to 45.22 kobo.
- Currently, the stock is trading at a price-to-earnings (P/E) ratio of 4.33x based on the trailing twelve-month EPS, which is higher than the banking sector average of 2.23x.
This higher valuation could be due to the bank’s robust growth prospects, strong financial performance, and strategic positioning in the non-interest banking sector.
The significant EPS growth and higher P/E ratio may make Jaiz Bank an attractive investment for growth-oriented investors looking for opportunities in the banking sector.
However, investors should also consider the relatively higher P/E ratio, as it may indicate that the stock is more expensive compared to its peers. This could mean a higher level of risk, especially if the bank fails to meet future earnings expectations.
Additionally, the market is placing a premium on its book value, as reflected in a price-to-book ratio of 1.96x. This indicates that the market values Jaiz Bank at nearly twice its book value and implies that the stock may be more expensive relative to its actual net assets, which could indicate a higher risk if the bank does not meet future performance expectations.
Bottomline
Jaiz Bank has shown impressive growth and good financial health and with strategic plans to bolster its capital base, it appears as an attractive option for investors seeking growth in the banking sector.
However, potential investors should weigh the associated risks, including the bank’s concentrated investment portfolio and higher valuation ratios.
Jaiz Bank’s low-priced shares may also be an encouraging factor for investors. As a low-priced penny stock, it offers affordability, making it accessible to a broader range of investors. This can be particularly appealing for those looking to enter the banking sector at a lower cost, with the potential for substantial gains if the bank continues its positive trajectory.
Furthermore, Jaiz Bank is a dividend-paying stock. Over the past five years, the bank has consistently paid dividends, demonstrating a commitment to returning value to shareholders. The last annual dividend was N0.04k, resulting in a dividend yield of 2.59%. This steady dividend history can provide a stable income stream for investors, enhancing the attractiveness of the stock.
For existing shareholders of Jaiz Bank, maintaining their positions appears prudent, given the bank’s robust performance, promising growth outlook, modest share price, and steady dividend payouts.
Prospective investors, however, should conduct thorough risk assessments, balancing the higher valuation with the attractive combination of a low share price and dividend yield, before reaching an investment decision.