By Martin Mwita
Kenya Commercial Bank Group is the most attractive bank in Kenya, a latest survey by investment management firm- Cytonn has shown.
According to Cytonn’s half one 2017 Banking Sector Report, KCB Group tops the country’s financial sector 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.
The report released on Monday ranks National Bank the 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.”
The banking sector has also witnessed increased consolidation, with smaller, uncompetitive banks being acquired, and the entrance of large global banks, such as Dubai Islamic Bank, and global suitors for Chase Bank.
“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,” said Caleb Mugendi, Investment Analyst at Cytonn.
Equity Group improved to position five from position six in Q1’2017 Banking Sector Report, due to impressive net interest margin at 9.7per cent , above industry average of 8.6per cent.
The bank’s return on average equity was 19.7 per cent, above the industry average of 18.1per cent, with the bank adequately diversified with Non-Funded income at 42.0 per cent of the total operating income, higher than the industry average of 31.3 per cent.
Standard Chartered Bank of Kenya dropped one position to rank ninth from position eight in quarter one, “due to a low intrinsic valuation, coming in at position 10 with potential return of -12.5 per cent. “
According to Cytonn, StanChart ranking was weighed down by high non-performing loans at 13.1 per cent, versus an industry average of 11.5 per cent, which affected its franchise value ranking.
Kenya’s listed banks recorded a 13.8 per cent decline in core EPS growth, compared to a growth of 15.5 per cent in H1’2016.
The poor performance was primarily on the back of an 8.1per cent decline in Net Interest Income following the capping of interest rates.
KCB Group was the only bank that recorded growth in NII, a 2.9per cent, following a 20.8 per cent decline in interest expense, as the bank managed to contain its cost of funding.
Deposits grew at 14.4 per cent during the first half of the year, a faster rate than loans, which grew by 9.3 per cent .
The loan growth came in lower as private sector credit growth slowed to 2.1 per cent in H1’2017, below the government’s set target of 18.3 per cent, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books.
Consequently, allocation to government securities rose to 32.2 per cent from 29.4 per cent 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, according to the investment firm.