Africa’s restrictive stock market rules: Why Tanzania’s banks are trading 3x under expected earnings

Published On: November 9th, 2021By 9.4 min readViews: 106

Restrictive stock market rules have been and continue to be a significant barrier to accurate price discovery in African markets.

Market players like organisations, analysts, shareholders and other stakeholders have vocalised the negative impact of the restrictions, so the fact that these rules persist is not for lack of mention.

But there’s some evidence that these discussions are being heeded, as described in Tim Staermose’s article below. Slow but noticeable change in the Tanzanian market proves that these efforts are not in vain.

Encouraging for those who’ve been doing the same in other African countries.


Net profits at Tanzania’s top banks rocket 40%+ year to date, yet they trade for under 3 times expected 2021 earnings

One major reason is an unusual set of trading rules on the local stock exchange that has prevented accurate price discovery. But that is now changing…

                Front page of The Citizen newspaper in Tanzania, 01 November 2021.

The two top banks in Tanzania: NMB Bank PLC and CRDB Bank published their third-quarter and 9-month financials recently. The numbers were fantastic, as I had been expecting.

NMB Bank’s net profit rose 42% year-on-year for the first nine months. CRDB Bank, NMB’s biggest rival, reported 9-month net earnings growth of 39.5%. I initially bought CRDB for the African Lions Fund, but later made a decision to take profits and switch to the higher quality (in my view) NMB. So far, that looks like a good move.

The Fund paid just under TZS 1,700 per share for NMB, accumulating its shares in the first half of 2021. At the current market price of TZS 1,740 per share, and with a dividend of TZS 137 already received, we’re up just under 12% on our investment.

CRDB is still a good buy, but we prefer NMB, and given we already have just under our maximum permissible portfolio allocation of 50% invested in the Tanzanian market, there is simply no room in our portfolio for CRDB at the moment.

For those who are interested, below are some of the highlights of both banks’ third-quarter, unaudited financial statements.



These two market-dominant banks are firing on all cylinders, and yet their share prices are stagnant. In the case of CRDB, its shares have been selling in the same price range since 1Q2021, and for NMB the share price has actually fallen this year.

This is because some shareholders were effectively trapped in NMB shares, due to the aforementioned trading rule constraints (a deeper explanation follows below), and now that they finally have a chance to exit, they are selling without regard to price.

But the banking business cycle here is still on the upswing. And I see greater profits and bigger dividends ahead for both banks over the coming years.

For CRDB and NMB, dividend payout ratios are typically only 30-35%, so the earnings retained (up to 70%) mean Earnings Per Share (EPS) can compound faster. The cycle will mature, but for now it’s growth time.

Restrictive trading rules at the Dar es Salaam Stock Exchange served African Lions Fund well, buying off-market blocks, but until very recently trapped local retail investors in NMB shares for years…

The Dar es Salaam Stock Exchange (DSE) has a trading rule that “large capitalisation” stocks, with total market value of over TZS 1 trillion (about US$435 million at current exchange rates) can only move up or down 5% in a day, trading on market. For smaller stocks it’s +/-10%. Moreover, 0.005% of a company’s total shares must turn over in a session to move the price up or down.

For NMB, with 500 million shares outstanding, 25,000 shares must change hands in one session to move the price. For years – until a few weeks ago – NMB shares had been offered “limit down” at TZS 2,340 on market with no buyers of enough shares (25,000) at that price to get the “closing price” to move down. Finally, enough shares traded in three sessions at 2,340, 2,240 & 2,140, progressively moving the closing price down by the maximum allowable 5% in a session (rounded to the nearest tick-size of TZS 20).

Meanwhile, in so-called off-market, pre-arranged block trades, also executed via the exchange, but which must be for a minimum total trade value of TZS 200 million (approximately US$87,000), the exchange can approve any price. Effectively, smaller investors were locked out of this avenue for buying or selling their shares, unless they could band together and make up a block of the required minimum size, TZS 200 million, which is a very significant sum in a country such as Tanzania.

For these larger, off-market trades done in the first half of 2021, NMB was routinely trading at TZS 1,700, and there was even one large block, which African Lions Fund participated in, which went through at TZS 1,450.

Partly because of these restrictive trading rules, a two-tier market has developed for many DSE-listed blue-chip shares, such as NMB, with most of the action being in pre-negotiated block trades, and not via the on-market price auction.

As a result, many foreign funds won’t buy shares here, no matter whether they are of good fundamental value or not, because this two-tier system creates headaches with their accounting, audit and compliance functions. And they are just not prepared to deal with this.

For example, I know of a sizable South African fund that agrees that NMB’s fundamentals are strong, and its shares are very undervalued, but won’t currently touch the stock because of the DSE’s trading rules.

Recently, due to the efforts of a number of people, including me, to get the story out there as to the great value offered by NMB, the market has slowly begun to function again. Buyers have shown up and paid up for shares on-market, and got the NMB price moving there again so the two-tier price issue is no longer a problem.

Off-market trading has stopped, and stale sell orders are being filled on market by the new buyers who see the value and growth.

I am thus hopeful that foreign funds, such as that one in South Africa, will once again consider investing. I am on the record as stating that I believe NMB is fantastic value up to a price of TZS 2,040.

Opportunities not limited to the banks

There are plenty of high-quality, blue-chip stocks in other industries that are similarly “stuck.” Tanzania Cigarette Company (TCC), Tanzania Breweries (TBL), and Vodacom (VOD), to name a few. Unfortunately, the gap between the on-market and off-market prices are so wide that I don’t think the two will meet without some intervention by the exchange, either via a one-off price adjustment, which the rules do permit, or a change in the trading rules to remove the restrictions on maximum percentage price changes and minimum volumes to allow better price discovery.

Tanga Cement (TCCL) is another example of a stock that’s now stuck in price. In its case, the price cannot adjust HIGH enough. It’s bid “limit up” at TZS 495, which is 10% higher than the last traded price of TZS 450. But there are no sellers. So, the closing price can’t adjust nearer to the recent TZS 3,157 price (subject to adjustments) that the local subsidiary of Heidelberg Cement in Tanzania has recently bid for a controlling 68% shareholding in Tanga currently held by Afrisam. Obviously, no one, including African Lions Fund, is currently willing to sell Tanga at TZS 495 when MUCH more could be in the offing.

Unfortunately, the only way this stock will again trade on market is if the trading rules change and the restrictive price bands are removed, or the Exchange steps in and allows a one-off price adjustment.

The time is ripe for that. Interest in the market here is poised to increase as we keep spreading the word on the great blue-chip bargains that exist. Where else in the world can you buy a market leading blue-chip bank growing earnings at 40%+ on a P/E of 3x?!

When might a change in the trading rules happen? Nobody knows. These things take time in a country like Tanzania. Policy makers are cautious and tend to wait for consensus. Few people want to stick their neck out and take a risk by changing the status quo, even when it makes a lot of sense. That’s just the way it is.

But I am in no rush. For African Lions Fund, I am looking to multiply investors’ money over five to ten years. And while waiting, I’m happy to take the high dividend yields that these companies offer.

For example, in 2020, NMB paid TZS 137 per share. That’s a 7.9% yield on the current share price of TZS 1,740. But this year I expect the bank to earn between TZS 575 and TZS 600 per share, and pay TZS 175 to 200 as a dividend, putting the indicative dividend yield in the 10.1% to 11.5% range.

CRDB paid 22 TZS per share last year, representing a 9.2% dividend yield on the current price of TZS 240. For 2021, the bank should earn enough to pay a dividend of TZS 29-31. So, the current indicative dividend yield is 12%-13%.

The main reason African Lions Fund has invested in NMB and not CRDB is that NMB has a significantly lower cost structure. The two banks are almost exactly the same size, both in terms of their balance sheets, and the number of branches, employees, and agents. So, we can’t put our finger on why it is that CRDB’s costs are so much higher. Moreover, in past credit cycles CRDB, for whatever reason, has ended up with a larger portion of Non-Performing Loans on its balance sheet than NMB.

That said, CRDB’s shares are trading at a slight discount to NMBs, and at a higher indicative dividend yield, which probably compensates for this adequately.

I know there are currently sellers and buyers of CRDB shares in the market in size – 10 to 15 million shares – on both the buy and sell sides. And liquidity in these shares is generally decent. For NMB, the selling looks to have dried up at these levels, but buyers can bid on market at slightly higher prices and see whether any sellers can be tempted to off-load.

With zero interest rates in much of the world and 15%-30% returns on equity readily available in Africa on blue-chip stocks such as NMB and CRDB, my thesis remains that capital will eventually flow here, where the opportunities are.

But Africa needs friendly investment policies, stability and consistent implementation of the laws that are on the books for investment here to be attractive to most people from developed markets. That, and a change to the restrictive trading rules on the DSE would be great places to start.

For the patient investor, Africa is a continent of great opportunity.

Until next time, Good Investing!

Net profits at Tanzania’s top banks rocket 40%+ year to date, yet they trade for under 3 times expected 2021 earnings” by Tim Staermose is licensed under CC BY-NC-ND 4.0.

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About the author: Rob Stangroom

My mandate for listed companies in Africa is to commercially leverage direct contacts with retail and professional investors. AfricanFinancials is an initiative for listed companies, by listed companies to implement good communications governance and investor relations practices. Many companies don’t care about retail investors, BUT in the modern day of social and digital media theýre missing out on commercial opportunity: an investor typically is and should be a customer.

More posts by Rob Stangroom

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