Why Nigerian bank stocks rallied this week

Thirty-one Nigerian companies sit inside the FTSE Russell Frontier Market Index, a list that global investment funds use to decide where to put money. Last week, 16 of those 31 rose, six fell and nine didn't move. Banks did most of the rising.

Two things had just happened. Nigeria's main interest rate was cut by 350 basis points to 23%. And on 21 September, Nigeria returned to FTSE Russell's frontier market status, which reopens the door to foreign funds that only buy what's on the index.

First, a correction worth making

You'll see this week described as Fidelity Bank leading the gains. It didn't.

NAHCO led the gainers, rising 16.92% — nearly double Fidelity Bank's 9.56%. What Fidelity led was trading: more of its shares changed hands than any other company on the list.

Those are two different things, and the difference is the most interesting part of the week. A stock can rise sharply while barely being traded, or be traded furiously while rising modestly.

What does "traded the most" actually mean?

Fidelity Bank shares changed hands 893.69 million times last week, worth ₦18.30 billion.

Zenith Bank was second, with 260.08 million shares — but worth ₦34.00 billion.

So Fidelity moved 3.4 times more shares than Zenith, yet the money involved was only about half as much. (Derived.)

The reason is price. Across the week, Fidelity shares traded at roughly ₦20 each on average, while Zenith's traded at roughly ₦131. (Derived by dividing each company's traded value by its share count.) Cheaper shares mean more of them move for the same amount of money.

To put Fidelity's week in perspective: nearly one in every five shares traded on the entire Nigerian Exchange last week was a Fidelity Bank share. (Derived.)

How much money are we talking about?

Shrink the whole exchange to ₦100. Of every ₦100 that changed hands on the NGX last week, about ₦50 moved through just these 31 companies. (Derived: ₦120.31bn of the exchange's ₦240.82bn total.)

By share count rather than money, those 31 accounted for 47.1% of the exchange's 4.69 billion shares traded.

Thirty-one companies, roughly half the market's activity. That tells you how concentrated the Nigerian stock market is.

Why would a rate cut lift bank shares?

A basis point is one-hundredth of a percentage point, so a 350-basis-point cut means 3.5 percentage points. The rate went to 23%, which means it was 26.5% before — a reduction of about an eighth of the old rate. (Derived.)

Kehinde Jones of Anchoria Securities said financial stocks leading the gainers is understandable given that cut, because lower rates support credit expansion and improve asset valuations.

In plainer terms: when borrowing costs less, more people and businesses take loans. Banks lend more. And investors are generally willing to pay more for shares when rates fall, because safer alternatives like fixed deposits are now paying less.

So was it the rate cut, or the index return?

This is where the analysts in the report disagree, and that disagreement is worth preserving rather than resolving.

Kehinde Jones (Anchoria Securities) points to the rate cut.

Ayomide Emmanuel (Marathon Asset) describes something different — a deliberate "rotation of capital out of mid-cap banking and consumer goods names" toward bigger, higher-yielding tier-one banks. That reading is supported by the losers: Wema Bank fell 3.76% and FCMB fell 0.45%, both smaller banks, while the tier-one names rose.

Victor Odulate, a third analyst quoted, cautions that big institutional investors take time to move money, and that it is too early to credit the FTSE Russell re-listing.

His point is simply arithmetic. The re-listing happened on 21 September. This trading week followed within days. Large global funds don't reposition that fast.

Who else moved?

Up: NAHCO (+16.92%), Fidelity Bank (+9.56%), Stanbic IBTC (+7.19%), NASCON (+7.10%), Fidson Healthcare (+5.25%), Zenith Bank (+4.90%), First HoldCo (+3.13%), GTCO (+2.39%), UBA (+2.04%), Access Holdings (+1.84%).

Down: Wema Bank (-3.76%), MTN Nigeria (-3.03%), United Capital (-2.29%), Nigerian Breweries (-1.87%), Dangote Sugar (-0.70%), FCMB (-0.45%).

What to watch

This section is Rainingmoney's reading.

Whether the buying lasts. One week is not a trend. If the FTSE Russell return is genuinely pulling foreign money in, it should show up over weeks, not days — which is exactly what Odulate's caution implies.

Whether the rotation continues. If money is genuinely leaving smaller banks for tier-one names, Wema and FCMB should keep underperforming. If they bounce back, the rotation story weakens.

What the rate cut does to your savings. The same cut that helps bank shares reduces what deposits pay. Borrowers gain, savers lose.

Fidelity's volume. Nineteen percent of an entire exchange's weekly share volume in one stock is unusual. Watch whether that persists or fades.

The bottom line: banks had a good week, but the week is too short to tell you why — and anyone offering a single clean explanation is going further than the numbers allow.

This article is for information only and is not investment advice.