Why Do Prospective Investors Look the Other Way While Bank Profits Surge?

Why Do Prospective Investors Look the Other Way While Bank Profits Surge?

Oct 18 , 2025. By Shimelis Araya (PhD) ( Shimelis Araya (PhD) studied agricultural and development economics at the Justus Liebig University (JLU) Giessen, Germany, and works for the Development Bank of Ethiopia (DBE). )

Earnings per share should serve as a signal beyond numbers on a balance sheet. They are also about psychology, memory, and the stories people tell themselves about risk and re-ward. Even when the math favours stocks, the mind can pull in another direction. Under-standing that dynamic is essential, not only for individuals hoping to build wealth, but for the development of a capital market and the economy as a whole, writes Shimelis Araya (PhD) - shimelisa@dbe.com.et - director of strategic planning and change management at the Development Bank of Ethiopia (DBE).

In the domestic banking industry, earnings per share (EPS) have emerged as a potent barometer of corporate performance. The formula could be deceptively simple. EPS measures how much a bank earns for every outstanding share, serving as an anchor for equity valuation. Yet, its implications are anything but trivial.

For many retail investors, it can represent the difference between idle capital in a savings account and wealth accumulation through equity ownership. In an environment shaped by shifting macroeconomic trends and regulatory overhauls, the signal from the banks has been remarkably strong. In the 2023/24 fiscal year, the average EPS for all commercial banks was near 20pc. For every 1,000 Br invested in bank shares, shareholders could expect around 200 Br in earnings.

Among the top 10 performing banks, the average climbed to an impressive 33.3pc. Early data for 2024/25 show that the best-performing banks are still pulling ahead, with EPS growth compared to the year before. The contrast with deposit rates could not be evident, though. Interest income on savings accounts is seven percent, making shares far more attractive on paper than traditional deposits. Yet, despite the wide gap, questions remain about what actually drives people to invest in stocks.

The idea of building wealth through the stock market is not new, nor is the debate over the best way to invest. Benjamin Graham, a professional investor and Columbia University professor, shaped generations of investors through his 1949 book, "The Intelligent Investor." Warren Buffett, who studied under Graham, called him his “intellectual hero.” Graham’s message was clear. Investment is most intelligent when it is most businesslike.

Graham's philosophy underlines the difference between a stock’s price and its underlying value. Careful analysis of financial statements, he argued, can help investors distinguish real value from speculation, using tools like the price-to-earnings ratio, the market price per share divided by annual earnings per share. His work has stood the test of time as a foundational text, though it was shaped by the realities of mid-20th-century markets.

The one-sided views presented in his book may need to be revised to reflect modern market conditions and other unforeseen factors, for his approach gives little weight to the psychology of investing. Since his era, the investment landscape has changed dramatically. One key area is behavioural finance. Contrary to traditional finance approaches that rely on rational judgment, behavioural research combines psychology and economic theory, investigating how investors often act irrationally due to cognitive biases. In recent decades, behavioural economics has moved from the fringes to the mainstream.

Richard H. Thaler, winner of the 2017 Nobel Prize in economics, and Daniel Kahneman, who won in 2002, both focused on the psychological factors that shape financial decisions. Thaler’s book, "Misbehaving: The Making of Behavioural Economics," studies why people buy stocks, how cognitive biases distort investor behaviour, and how these biases can lead to inefficient decisions.

A few key behavioural insights can help explain why, despite the clear financial advantage, so many Ethiopians still prefer saving in banks or buying property rather than investing their savings in stocks. One such concept is the "availability heuristic," which Daniel Kahneman described in "Thinking, Fast & Slow." This mental shortcut leads people to estimate the likelihood of events based on how easily examples come to mind.

If a negative event is vivid or recent, people are more likely to think it will happen again, even if the statistical odds are low. Memories of unregulated share offerings before the establishment of the Ethiopian Capital Market Authority (ECMA) still linger. At that time, promoters issued shares with little oversight, leading to fraud and the loss of public funds. Banks were a rare exception, benefitting from regulation by the National Bank of Ethiopia (NBE). But many companies failed, costing investors dearly and eroding public trust.

Such practices were recurring topics of discussion and a recent phenomenon. These enduring images stored in our minds have an outsized influence on our decisions, leading us to overestimate the likelihood of such events, a heuristic in action. Also known as availability bias, it describes the tendency to base decisions on recent and memorable experiences rather than on a balanced review of the facts.

Individuals remember the stories of lost savings, shaping their views of share offerings with suspicion, even when times have changed. The related concept of “loss aversion” means these individuals would rather avoid losing money than make a risky bet, even if the odds are in their favour. This bias explains why investors might hold investments to avoid further losses, even as the potential for gains goes untapped.

The power of these biases is best captured by a familiar example from outside finance. Consider the choice between flying and driving.

Assuming that costs are similar, what would someone prefer?

Statistically, air travel is much safer than driving. Still, many people fear flying. The terror attacks on September 11, 2001, left images of plane crashes etched in memory. The terrorists struck twice. First with force, and then with the help of our brains. After the attacks, Americans avoided flying and drove more. Road fatalities soared. In the 12 months after 9/11, the deaths on the road exceeded the total for the previous five years combined. The death toll became six times higher than the total number of passengers who died on board the four fatal flights. If these victims had chosen to travel by plane, they could have survived.

The statistics are clear, but fear, especially fear linked to dramatic events, has its own logic. The assumption is that, as many claim, they feel in control when they drive, but not when they fly. Passengers sitting even next to the driver, not those in the back seats, have no control either, yet show little fear.

The same logic applies to investments. Many feel they are “in control” with a bank deposit or real estate, but see stocks as risky because they are at the mercy of outside forces.

Cognitive biases, left unchecked, can undermine rational investment choices. Being aware of them is the first step to making better decisions. The tendency to give more weight to dramatic stories, personal experiences, or sensational media reports, rather than hard data, can keep investors on the sidelines even when the numbers favour action.

However, the lessons of the past are useful, but the facts on the ground have changed. The market and the regulatory environment have shifted since the ECMA began its work. Its regulatory oversight has brought new rules, requiring issuers to pass a rigorous due diligence process. It ensures that public offerings comply with set guidelines, rebuilding public trust and restoring confidence in capital markets.

Still, caution is warranted. While new regulations reduce the risk of fraud, smart investing depends on careful research. Prospective investors are urged to examine a company’s history, seek advice from financial experts, analyse financial statements, and read prospectuses closely before committing funds.

PUBLISHED ON Oct 18,2025 [ VOL 26 , NO 1329]