Cytonn Investments has today released its FY’2017 Banking Sector Report, which ranks KCB Group as the most attractive bank in Kenya, a position it has retained since 2015, 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. HF Group ranked lowest overall, ranking last in the franchise ranking.
“The Kenyan banking sector has witnessed a challenging operating environment, following the capping of interest rates, coupled with tighter regulation. The report, themedDiversification and efficiency key to growth amidst tighter regulation’, analyzed the results of the listed banks using their full-year 2017 audited 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 Maurice Oduor, Cytonn’s Investments Manager. “Banks will 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”, added Maurice. “We have looked at four key focus areas, which are regulation, diversification, efficiency, and asset quality in this report. With a tighter regulated environment following the capping of interest rates and adoption of IFRS 9, diversification and efficiency will prove to be the key growth drivers in the banking sector, coupled with prudence in the wake of deteriorating asset quality.”
“We expect the relatively challenging operating environment for the banking sector to persist in 2018, especially with the coming into effect of IFRS 9, which takes a forward-looking approach to credit assessment. In addition, the Central Bank of Kenya stated that banks will have to take a full hit in the provisions for loans issued from 2019 onwards, which will likely reduce capital positions for banks with poor asset quality, forcing them to raise capital in the near future” said Caleb Mugendi, Investment Analyst at Cytonn Investments. “With the deteriorating asset quality, evidenced by the rising non-performing loans, we expect banks to be more prudent in loan disbursement in order to address the concerns around asset quality and enhance cost rationalization measures, in a bid to protect their profitability,” added Caleb.
KCB Group ranked 1st position on the back of a high return on average equity of 19.5% compared to an industry average of 13.8%, as well as an optimal loan to deposit ratio of 84.6%, compared to an industry average of 83.0%. Equity Group ranked 2nd, recording the highest return on equity at 21.6% and had the best asset quality, with the lowest Non-Performing Loans ratio of 6.2% compared to the industry average at 12.4%.

I&M Holdings climbed up 4 spots to Position 3 from Position 7 in our Q3’2017 Banking Sector Report, owing to its efficiency, with the bank having the lowest Cost to Income ratio at 56.2%, lower than industry average of 67.4%, and strong deposit gathering capability, with deposits per branch of Kshs 4.0 bn, much higher than the industry at Kshs 2.7 bn.
Kenya’s listed banks recorded a 1.0% decline in core EPS growth in 2017, compared to a growth of 4.4% in FY’2016, and a 5-year average growth of 6.7%. Only National Bank and Equity Group recorded a growth in core earnings per share. Key to note is that National Bank restated their 2016 results, and benefitted from a decline in loan loss provisioning, while Equity Group’s performance was on the back of a 24.2% growth in Non-Funded income (NFI). Deposits grew at 12.5% during the year, a faster rate than loans, which grew by 6.1%. The loan growth came in lower as private sector credit growth remained low at an average of 2.4% in 2017, below the government set target of 18.3%, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books.

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