Cytonn Investments has released its H1’2018 Banking Sector Report, which ranks KCB Group as the most attractive bank in Kenya, a position it has retained since FY’2016, supported by a strong franchise value and intrinsic value score. The franchise score measures the broad and comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential. Housing Finance Group ranked lowest overall, ranking last in the Franchise value score.
“The Kenyan banking sector has fared relatively well in the face of a challenging operating environment, following the capping of interest rates, coupled with increasingly tighter regulation. The report, themed ‘Growth and Efficiency aided by Technology, amid deteriorating Asset Quality’, analyzed the results of the listed banks using their H1’2018, unaudited results 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 Ian Kagiri, Investment Analyst at Cytonn Investments. “Banks will continue to put more emphasis on alternative revenue streams to boost their Non-Funded Income and adopt an efficient operating model through alternative banking channels and digitization in order to remain profitable under the tough operating environment of compressed margins”, added Ian. “We have looked at four key focus areas, which are regulation, diversification, technology and asset quality in this report. With a tighter regulatory environment following the capping of interest rates and adoption of IFRS 9, diversification of revenue, cost management and asset quality management will prove to be the key growth drivers for players banking sector.”
“We expect the banking sector to record a recovery in earnings compared to 2017, buttressed by the ongoing economic recovery from the harsh operating environment experienced last year due to the general elections coupled with the prolonged drought. Effects of the aforementioned have spilled over to the current year, as shown by the deterioration in the industry’s asset quality, largely attributed to several sectors such as manufacturing, retail and real estate. With the coming into effect of IFRS 9 in January 2018 which takes a forward-looking approach to credit assessment and provisioning requirements, banks with poor asset quality will likely witness a depletion of their capital bases as they have to set aside provisions for both the performing and non-performing loans.” said Faith Maina, Investment Analyst at Cytonn Investments. “With the deteriorating asset quality, evidenced by the rising non-performing loans, we expect banks to continue employing prudent loan disbursement policies, and consequently tightening their credit standards, in order to address the concerns around asset quality, in a bid to protect their profitability. This poses a challenge, as it points to reduced intermediation in the banking sector, between the depositors and the credit consumers, one of the banking sector’s main function. We have seen banks adjusting their business models with lending skewed mainly towards collateralized lending and working capital financing.” added Faith.
KCB Group ranked 1st on the back of a high return on average equity of 21.9%, compared to an industry average of 19.5%, as well as high efficiency, with a Cost to Income Ratio of 52.0%, compared to an industry average of 55.7%. Equity Group ranked 2nd, recording the highest return on equity at 23.9%, the second best Net Interest margin at 8.8%, above the industry average of 8.1%, and the third best efficient bank with a Cost to income Ratio of 52.8%, above the industry average of 55.7%.
Co-operative Bank rose 2 positions to position 4 from position 6 in Q1’2018, owing to its optimal loan to deposit ratio of 84.6%, above the industry average of 73.6%, a relatively high net interest margin of 8.6%, above the industry average of 8.1%, and the highest capitalization with a tangible common ratio of 16.8%, above the industry average of 14.4%.
Kenya’s listed banks recorded a 19.0% growth in core EPS growth in H1’2018, compared to a decline of 14.4% in H1’2017, and a 5-year average growth of 6.7%. Only NIC Group and Housing Finance Group recorded declines in core EPS, registering declines of 2.1% and 95.7%, respectively. Deposits grew at 10.0% y/y, a faster rate than loans, which grew by 3.8%. The loan growth came in lower as private sector credit growth remained low at an average of 2.5%, in the 8 months to August 2018 below the five-year average of 13.0%, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books so as to manage the rising non-performing loans.
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, primarily in real estate.