Banks, brokers rejig share prices to hook investors

Our investigation shows that banks and stock brokerage firms form alliances in the run-up to fresh offers.

According to our findings, before coming to the market some of the financial institutions extend facilities to stock broking firms and other institutional investors to buy their stocks. The law of demand and supply plays out here as the excess demand over supply of the stock pushes prices up. This creates opportunity for speculators, including the relevant investors who capitalize on this to rake in huge returns from capital appreciation.

For example, before one of the bank’s offer opened , it traded at N6.89 towards the end of the first quarter but closed at about N18 per share by the end of October. Another bank’s share opened this quarter at about N30, up from a single digit last year. Yet another bank which is about coming to the market, has its price increasing from N7.99 to N11.80.

Business Day also learnt that the upward movement in prices increases the amount of money the bank realises from the offer, since a higher price fetches larger realizable capital. Ordinarily, the high price is supposed to be a disincentive to investors, but the manipulated price gain gives a false impression that the stock has potential for high returns.

Analysts say this explains the unsustainability of some bank stocks, which fall after the share allotments and lifting of technical suspension: This follows the offloading of the stocks by investors who earlier bought in large quantity, with a view to making capital gains.

Investment analysts say such a development is capable of hurting the market as it is believed that the fundamentals do not justify the artificial prices. They cite the crash in some Asian countries as reference points.

Chike Nwanze , managing director of Icon Stock Brokers, said such acts could ridicule the Nigerian market, if not checked. Nwanze cautions that the involvement of speculators (short term investors) and entrepreneurship trading ( a term he used to describe brokers who trade for themselves) could lead to share price ballooning without improvements in financial performance.

Ariyo Olushekun, managing director of Capital Assets says such practices could be risky as both the investor and stock broker would be carrying a huge risk. He asked "what happens if the objective of capital gain is not achieved and the investor or stock broker fails to pay?"

Okechukwu Unegbu , managing director , Maxifund Investment and Securities Limited, believes that the pre-offer high price of bank stock is traceable to investors frustration with the delay of in issuance of certificates of shares bought in the primary market. According to Unegbu, as a way out they opt to take positions in the secondary market to get their certificates on time. This, he said, leads to a rise in price. The stock broker however observes that the act of using bank loans to buy such financial stocks is unethical and cautioned against it.

To stem the dangerous trend and save the market some undue pressure, the Central Bank recently threatened to ban the practice of banks giving loans to stockbrokers to finance investment in shares on their behalf.