Cytonn Investments has today released its H1’2017 Banking Sector Report, which ranks KCB Group as the most attractive bank in Kenya, supported by a strong franchise value and the intrinsic value score. The franchise score measures the broad and comprehensive business strength of the company across 13 different metrics, and the intrinsic score measures the investment return potential. National Bank ranked lowest, ranking low in both the franchise and intrinsic value score.“The report, themed “Transitioning to a more Disciplined and Efficient Sector”, analyzed the results of the listed banks in the first half of 2017 so as to determine which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective,” said Maurice Oduor, Cytonn’s Investments Manager.  “We are now seeing banks adopting a more disciplined approach, following rising non-performing loans and the capping of interest rates, while also employing cost rationalization measures in a bid to enhance efficiency under the current operating environment”, added Maurice.

“We are already witnessing increased consolidation in the banking sector, with smaller, uncompetitive banks being acquired, and the entrance of large global banks, such as Dubai Islamic Bank, and global suitors for Chase Bank,” said Caleb Mugendi, Investment Analyst at Cytonn Investments. “We shall continue to witness increased consolidation, and we expect the industry will become more stable where only the banks with a strong competitive advantage, either in capitalisation, deposit gathering or niche shall remain,” added Caleb.

Equity Group improved to Position 5 from Position 6 in our Q1’2017 Banking Sector Report, due to impressive Net Interest Margin at 9.7%, above industry average of 8.6%, and a Return on average Equity of 19.7%, above the industry average of 18.1%, with the bank adequately diversified with Non-Funded income at 42.0% of the total operating income, higher than the industry average of 31.3%.

SCBK dropped 1 position to Position 9 from Position 8 in our Q1’2017 Banking Sector Report, due to a low intrinsic valuation, coming in at position 10 with potential  return of -12.5%. Standard Chartered Bank’s ranking was weighed down by high non-performing loans at 13.1%, versus an industry average of 11.5%, which affected it’s  Franchise Value ranking.

Kenya’s listed banks recorded a 13.8% decline in core EPS growth, compared to a growth of 15.5% in H1’2016. The poor performance was primarily on the back of an 8.1% decline in Net Interest Income (NII) following the capping of interest rates. KCB Group was the only bank that record growth in NII, a 2.9%, following a 20.8% decline in interest expense, as the bank managed to contain its cost of funding. Deposits grew at 14.4% during the first half of the year, a faster rate than loans, which grew by 9.3%. The loan growth came in lower as private sector credit growth slowed to 2.1% in H1’2017, below the government’s set target of 18.3%, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books. Consequently, allocation to government securities rose to 32.2% from 29.4% in H1’2016.

The sector has remained resilient by adopting a disciplined banking approach. Consolidation is set to gather pace as key issues such as increased loan loss provisioning and the regulated loan and deposit pricing framework prevail in this challenging operating environment. This in turn will transition the industry into one with fewer, but stable banks, leading to a more efficient and stable banking sector.

Cytonn Investments is an independent investment management firm, with offices in Nairobi – Kenya and D.C. Metro – U.S. We are primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 billion of investments and projects under mandate, mainly in real estate.

Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments and Cytonn Real Estate manage over Kshs 82.0 billion of real estate projects.